A Plethora of Headaches

We hope the recent market turmoil is not giving our readers too much of a headache. As you are no doubt aware, the events of the last few weeks have made maneuvering around global markets rather difficult.

 

A less than happy NYSE floor trader [PT]

Photo crdit: Brendan McDermit

 

The US faces uncertain economic times, as Trump and Xi Jinping remain locked in a bitter trade dispute that is likely to go on for some time, creating uncertainty for the future of economic relations between the world’s two biggest economic powerhouses [ed note: over the weekend news emerged that Trump and Xi agreed on a truce and no further escalation in the dispute should be expected for the time being, but it remains to be seen whether the hatchet will remain buried for good].

On the other side of the Atlantic, Brexit is still not off table – on the contrary, it has proved to be an endless saga which has been in the media spotlight for almost two and a half years now. On top of that, Italy’s budget drama is giving the markets the jitters, as is the latest confrontation between Russia and the Ukraine.

The USD is rallying strongly against this backdrop, which is contrary to its typical behavior at this time of the year. What should one make of this development? Will the US dollar continue to appreciate, or will its usual pattern of a seasonal decline at the end of the year prevail?

 

The Euro Typically Rallies at the End of the Year and Falls Again Immediately Thereafter

The chart below illustrates the seasonal trend of the euro relative to the US dollar. It is not the type of price chart one usually encounters. Rather, the seasonal chart depicts the average trend in the euro in the course of a calendar year.

The horizontal axis shows the time of the year, the vertical axis the average percentage move in in the exchange rate over the past 43 years. In this way the seasonal trends of the euro can be discerned at a glance.

 

Euro vs. US dollar, seasonal trend over the past 43 years. A strong seasonal uptrend in the euro is in evidence at the end of the year.

 

The period of seasonal strength in the euro at year-end is highlighted in blue. This phase begins on November 27 and ends on December 31.

Thereafter the euro typically declines again. If you look closely at the chart, you will notice that the change in trend occurs precisely at the turn of the year. This is quite conspicuous and there has to be a reason for it – more on this further below.

 

Strength in the Euro at the End of the Year is no Coincidence

The average gain in the seasonally strong period between November 27 and December 31 amounts to 1.24 percentage points – quite a sizable amount, as currencies tend to be far less volatile than e.g. stocks.

The following bar chart shows the percentage moves in the exchange rate in the period November 27 – December 31 for every year since 1975.

 

Euro vs US dollar: percentage return between 11/27 and 12/31 for every year since 1975. The euro typically rallies at year-end.

 

The green bars indicate gains. They predominate both in terms of size and frequency. This makes clear that the euro’s seasonal rally at the end of the year  is not generated by a handful of statistical outliers. What is the reason for the euro’s strength at this time of the year though?

 

What Drives the Euro’s Seasonal Rally at the End of the Year

The fact that the euro turns down vs. the US dollar again, right at the turn of the year already hints at the likely cause of this seasonal pattern. It has to be directly linked to the calendar. And what happens at year-end? It is the balance sheet date!

The euro’s year-end rally inter alia has to do with US tax legislation. Many US companies are able to reduce their tax liability by understating certain financial figures as much as possible at the reporting date. In this context it can be worthwhile to transfer funds to the accounts of foreign subsidiaries.

The associated increase in demand for the euro naturally has an effect on its exchange rate. Therefore,  the euro typically strengthens against the dollar late in the year.

After the turn of the year, the tide immediately turns again as companies reverse these transfers of funds. The typical move in the euro’s exchange rate against the US dollar is therefore primarily a result of tax avoidance strategies practiced by US companies.

What is the effect on other currencies though? Find out more about this in our web-based application.

 

Make Use of These Patterns!

With the help of the Seasonax Web App, you can examine such patterns – using nothing more than your browser. You can analyze more than 12,000 assets and find seasonal patterns of your own. We invite you to visit  app.seasonax.com and test out the patterns we offer for free.

There are no guarantees in the markets, but you can certainly let probabilities work in your favor!

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com , which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange.

You can find an introduction to the Seasonax app and in-depth information on what it can do here. Furthermore, here is a complementary page on the web-based Seasonax app, which costs less and offers slightly different functionality (note: subscriptions through Acting Man qualify for special discounts – for both the Bloomberg/Reuters and the web-based versions of the app. Details are available on request – simply write a note to info@acting-man.com with the header Seasonax!).

 

Charts by: app.seasonax.com

 

Image caption & editing by PT