'Tis the season — when the US dollar has tended to reach an interim peak in mid/late November before trending at best sideways but usually lower through the end of the calendar — and tax! — year. It being the world’s reserve, other currencies thus tend to rally through December. But they do so at their own respective paces. Who’s hot — and who’s not?
Consider the Australian (A$) and Canadian (C$) dollars. The Australian fiscal year runs July-June; the Canadian, April-March. The two countries and their economies are similar, but their seasons and hemispheres are opposite. Furthermore, one country exports to the world’s largest economy and the other to the world’s largest emerging economy. Thus, their currencies are closely related but also pulled in different directions at different times of the year — ideal for seasonal spreads.
The seasonal pattern for the A$ illustrates how it has tended to behave in the Southern Hemisphere’s spring and early summer. It rises (against the US$) from mid/late November into early December, pulls back into mid December, and then runs higher into early/mid January. In fact, MRCI has found that March Australian Dollars have closed higher on about January 13 than on about November 12 in 14 of the last 15 years.
In contrast, the seasonal pattern for the C$ suggests it has tended to bounce modestly from mid/late November into early December before trending at best sideways but more typically lower into early January and a frozen Canadian winter. The net effect has been for the A$ to regularly outperform C$ from late November into early/mid January. For example, the Long March Australian/Short March Canadian Dollars spread has closed more favorably toward A$ on about January 10 than on about November 25 in 14 of the last 15 years — in only 4 of which suffering any daily closing drawdown greater than 0.98. (The minimum increment of 0.0001 for both CME futures is worth US$10.00. Brokers accept nominal spread orders.)
For the last four years, these two currencies have fluctuated from A$ at a premium to C$ of +7.26 to A$ at a discount of -8.23. This year’s spread traded with A$ at a premium of a little more than +1.00 several times into early September before falling by late September to a discount of as much as -3.12. The spread then retraced about 50% of its loss, narrowing its discount back to -0.88. Since then it has widened again back toward the September extreme, closing the week within about 0.50 from it.
How much of an effect will China’s efforts to stimulate its own economy have on the A$? Enough to reinforce normal seasonal influences on its tendency to outperform the C$? Will the September low at -3.12 hold? The last minor rally failed at -1.26, a penetration of which might signal a normal seasonal trend is underway.
Now consider a relationship between the Eurocurrency and Japanese yen. The fiscal year for the European Monetary Union runs January-December; that for Japan, April-March. The euro, like the D-mark before it, has exhibited a tendency to establish an interim low (against the US$) in mid November and then run higher into mid December on its way into the new year. In fact, MRCI has found that December Eurocurrency has closed higher on about December 12 than on about November 30 in 12 of its 15 years as a futures market.
In contrast, Japanese accounting methods consider the half fiscal year to be as important the whole. In fact, Japanese multinationals typically repatriate yen going into the end of the first half fiscal year to dress up their balance sheets. Thus has the yen tended to rise from April into a peak, established by no later than late November, and then to decline again into April.
The net effect has been for euro to outperform yen late in the calendar year. One of the more reliable segments of that seasonal trend has been going into expiry of December futures. For example, the Long December Eurocurrency/Short December Japanese Yen spread has closed more favorably toward the euro on about December 12 than on about November 29 in 14 of 15 years — albeit not without a few painful drawdowns. (The minimum increment for both CME futures is worth US$12.50. Thus, brokers accept nominal spread orders.)
This spread reached its all-time high in 2008 when the euro traded at a premium of +63.21 to yen. But by 2012, it had fallen to a discount of -7.28. The spread has been recovering with a vengeance since, reaching +42.71 last March. But then it weakened again, trending in orderly fashion down to only +32.99 by October.
But then it reversed yet again. By this past Thursday, in fact, it reached +40.73 and was poised to challenge its March high. Overnight, however, the European Central Bank announced it was prepared to whatever was required to stimulate Europe’s economy, leading most analysts to believe a massive stimulus package was in the works. As a result, the euro dropped hard and the spread backed off nearly 1.8o in the most significant correction of the current trend.
Will it need to correct further? A 40% retracement would come in just below 38.00. Notice how well this spread trends in daily, weekly, and monthly time frames. Further note that Japan eagerly wants the yen lower, although Europe wants the euro lower, also. Have the currency wars commenced?
Traders already in platinum/gold may wish to know that the Long 2 April Platinum/Short April Gold spread has closed more favorably toward platinum on about February 2 than on about November 27 for the last 18 consecutive years — albeit, again, not without drawdowns. This past week the spread again tested even money and rallied sharply.
If you have not already done so, you are encouraged to visit spread charts.
(Both for future convenience and for reference to past Commentaries, you can bookmark the WSC Index.) Please remember: These are NOT trading recommendations. They are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results. Futures trading involves substantial risk of loss.