Whilst doing some research recently I decided to take a look at some broader seasonal trends in USD to see if there were any distinguishable patterns that could be of use, especially given the current Dollar dynamic of reacting to data as players try to gauge a Fed lift-off date.
Interestingly, looking at the Dollar Index over the last 10 years, we can see that 7 of those 10 years, saw the Dollar bottom in April, and trade higher over May.
If we narrow the sample down to the last 5 years we can see that the Dollar bottomed in April every year and traded higher in May every year.
Pretty interesting right?
So how can we use this information?
Well lets consider what we’re seeing in the markets currently.
GBP, EUR & AUD are all in broad, long term down trends against the Dollar, but over these last 2 weeks we’ve seen some basing, and indeed some breakouts from descending trendlines.
What has fuelled this move?
In the run up to the April NFPs, markets had been heavily geared towards a Fed-lift off date towards the front of the assumed June-September range, but on the back of the shockingly weak number, this lift-off date was moved out and USD longs were reduced.
Data has continued to come in below expectations and the Fed stated in their FOMC minutes release that they expected the rate and pace of rate-hikes to be slow, citing the sluggish economy but highlighted their data dependant stance.
Since then we’ve seen further weak US data, fuelling further unwinding of USD long positions.
Well the Fed have said that they’re only going to raise rates once the data supports the move, so whilst weak data is coming in, no lift-off is in sight, so why hold USD longs? Hence we continue to see, short-term players and speculative players, covering USD longs and indeed profiting from USD shorts.
However, long term accounts still hold their broad USD long positions and understand this USD reaction to data, to be a short term variable.
If we consider EUR, the ECB’s QE program of EUR 60bln a month is still in play and will be through to September 2016 and will continue to drive investment flow out of Europe.
The Fed is still going to raise rates and has stated that it sees this period of weak US econ data as transitory, so in the short term, whilst these bullish moves against USD have provided some nice quick profits, the overall downtrend is still likely to resume and considering the seasonality of USD, it is highly likely that we see the Dollar trade higher over May.
NFPs next week could be the catalyst for this. What we are seeing currently across the board, is a shakeout of positions and basically, better levels to sell against USD.
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