Forex Trading in the Summertime

May 21, 2019

The calendar year in foreign exchange is more easily divided into three rather than four seasons, and the U.S. Memorial Day on the fourth Monday of May and Labor Day holiday on the first Monday of September encapsulate the middle period. This unofficial summer tends to have lighter daily volume than the other two parts of the year. Trading desks lighten as vacations are taken, and this can lend an erratic element to the pulse of the market.

In one important respect, summer is no different from other parts of the year. The potential for surprise shocks does not lessen. The First World War began and the Second World War ended in summer. In August 1971, dollar-gold convertibility and exchange market intervention were suspended by President Nixon. At one of the most chaotic modern times for the dollar, Federal Reserve intervention in favor of the dollar was resumed to “maintain orderly market conditions” in early July 1973. The announced collapse of Herstatt Bank under the weight of massive currency losses occurred in June 1974. In June of 1977, U.S. official statements asserting a need for a balance of payments correction was interpreted as intent to depreciate the dollar, which fell broadly and sharply over the ensuing year and a half. Iraq invaded Kuwait in August 1990, and a failed coup in the Soviet Union to topple Chairman Gorbachev happened one year later. The Asian debt crisis began on July 1, 1997, triggered by the Thai baht devaluation, and the subprime debt crisis surfaced ten years later in August 2007. British voters in June 2016 chose narrowly by referendum to leave the European Union without thinking first about how such was to be done.

Meaningful currency movement in summer can be less representative of economic fundamentals than at other times of the year. The dollar’s directional change between Memorial Day and Labor Day was different in sign from its calendar yearend-to-yearend change in half of the last 20 years against the yen: 2000, 2001, 2004, 2007, 2008, 2009, 2012, 2013, 2015, and last year. Against the euro, the dollar had a different directional move in the summers of 1999, 2001, 2003, 2004, 2011, and 2015 than its endyear-to-endyear trends.

While the distribution of years in which the dollar rose or fell was fairly even since the euro was launched in 1999, the directional bias in those twenty summers has been skewed downward. On an endyear-to-endyear basis the dollar rose 11 times against the euro while dropping 9 times; but between Memorial Day and Labor Day it rose 8 times and fell in 12 years. Relative to the yen, the dollar appreciated from endyear to endyear 10 times, fell 9 times, and once closed unchanged. However, among the last twenty summers, the dollar fell 13 times against the yen, rose just 6 times, and once closed unchanged.

The downward bias is also reflected in the dollar’s average change over the past twenty “forex summers.” The mean algebraic summertime change of the dollar¬† has been a drop of 1.75% against the yen and 0.4% against the euro. The greatest summertime rise and fall against the yen were an appreciation of 5.4% in 2008 and decline of 10.1% in 1999. The dollar rose during summer against the euro by as much as 8.1% (2008) and fell as much as 5.8%, which happened in 2017.¬† Those swings were, not surprisingly, much less in size than the yearend-to-yearend extremes of down 18.7% (2008) and up 21.4% (2013) against the yen and down 16.6% (2003) and up 16.1% (1999) versus the euro.

Finally, I counted the number of times both in summer and in a full year when the dollar moved by plus-or-minus 5.0% or more. Against the yen in summer it rose by at least 5% in just one of the 20 years but fell five times by 5% or more. Among the 20 calendar years, there were seven instances each when the dollar closed up 5% or more and down 5% or more. Against the euro, the dollar rose at least 5.0% in summer twice and fell by 5% or more three times. On an end-December to end-December comparison, there were 7 years when the U.S. currency rose at least 5% and six instance when it fell by 5% or more.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




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