Seasonality of the Dollar in Early January and Some Reflections on Rising Long-Term Treasury Yields

January 15, 2018

The dollar depreciated by 2.2% against the euro in the first half of January. That loss brings to three the streak of declines at the start of a calendar year. In the first January halves of 2016 and 2017, the dollar had on balance lost 0.5% and 0.6% relative to the common European currency. The dollar also recorded losses in the first half of January against the yen of 2.7% in 2016, 2.3% in 2017 and 1.9% this year.

These consecutive drops normally wouldn’t be newsworthy except that the development counters what previously had been a significantly consistent pattern of U.S. dollar strength at the start of the year. During the 14 Januarys from 1975 through 1988 the dollar had climbed against the German mark in the first half of those months 10 times and by an average of 0.9% over all 14 observations. Similarly, the dollar during the first half of January from 1999 through 2014 advanced 0.9% on average, so the replacement of the mark by the euro at the start of 1999 didn’t initially affect the dollar’s propensity to rise in the two first two weeks of each calendar year.  This reliable seasonal property remained intact in 2015 as well, with the dollar jumping 4.0% against the euro during the first half of January.

Last year’s second straight early January dip in the dollar turned out to be a harbinger of a difficult year. Coming into 2018, opinions are split on the dollar. The U.S. economy’s outperformance over recent quarters suggests dollar buoyancy, and so does the view that the Fed may be more hawkish this year than last in part to balance the easier fiscal stance. However, a widening U.S. current account deficit, angst over U.S. politics,  and signs that central banks in Japan and Euroland will be shifting policy gears away from stimulus may portend difficulty sledding for the dollar.

In recent weeks, talk that the multiyear bull market in U.S. Treasuries may at last run its full course has captured even more financial market attention that the dollar. Looking into this matter, I compared the current 10-year Treasury yield of 2.55% to yield prevailing in mid-January each year going all the way back to 1990. This is the fifth year out of the full twenty-nine examined when the yield at a “2” handle; by handle, the digit to the left of the decimal point is meant. Two of the other years had “2” handles, those being 2.40% in mid-January 2017 and 2.03% a year before that. The largest yields were coincidentally both at 8.17% and occurred in the consecutive years of 1990 and 1991. There were two years, 1992 and 1995, when the 10-year Treasury yield had a handle of “7” and three years (1993, 1997, and 2000) when the handle was “6.” A handle of “5”, happened in 1994, 1996,  1998, and 2001. A “4” handle occurred most frequently of all: 1999, 2002, 2003, 2005, 2006, and 2007 (just a half year before the onset of the subprime loan crisis).There were four years with a “3” handle (2004, 2008, 2010, and 2011) and three years with a “1” handle, those being 2012, 2013, and 2015. Besides the three most recent mid-January readings, the other two with a handle of “2” occurred in 2009 (just a few months before the Great Recession ended) and 2014.

In no years was the mid-January 10-year Treasury yield below 1.0%. Germany, by contrast, had a mid-January 10-year bund yield below 0.6% four times (2015, 2016, 2017, and now), as well as three others (2012, 2013, and 2014) with a handle of “1” in mid-January. In Japan’s case, the handle has been “1” in mid-January in thirteen different years (1998 through 2011 except 2007) and “zero” in eight other years (2003 and each year since 2012). 1991 was the year when in mid-January, Germany’s 10-year bund and Japan’s 10-year JGB yields were most elevated. Germany was dealing with the inflationary fallout of the merger of the West German mark and the East German Ostmark. The bund yield in mid-January 1991 was a lofty 8.99%, 82 basis points higher than the 10-year Treasury yield at the time. Japan’s JGB in response to aggressive Bank of Japan tightening to counter inflation and excessive money growth was then 6.93%, 124 basis points lower than the Treasury yield at the time.

As these last comparisons suggest, yield differentials between the United States on the one hand and Germany and Japan on the other have been far less volatile than the raw 10-year sovereign yields. The current Treasury-minus-bund yield spread is 1.97% versus 2.08% a year ago, and the U.S.-minus-Japanese spread is 2.48% versus 2.36% in mid-January 2017. In 22 of the years, the U.S.-minus-German 10-year spread in mid-January was less than plus-or-minus 1.0%, and all the other years had a spread handle of “1”.

Some analysts make a compelling argument that the dollar’s external value in 2018 is apt to be influenced less by fundamental economic trends than perceived political matters including geopolitical strains. Business cycles seem more synchronized than they have been in many years. In light of massive offshore holdings of dollars built up as the pre-eminent reserve currency asset since World War II, the continuing drumbeat of provocative rhetoric and actions by the Trump Administration including the risk of protectionism will be fraught with market-moving possibility.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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