What is Exchange Rate Seasonality?

How Does It Affect Your Money?

recurring transfers

Exchange rate seasonality is a currency valuation change that happens at the same time every year or in most years. It may be incorporated into technical analysis in an attempt to create more precise currency forecasts. For example, if the USD has fallen against the EUR during the month of May in 8 out of the last 10 years, that pattern may be considered currency seasonality.

What causes seasonal trends in the forex market?

Some seasonal trends may be attributed to macroeconomic factors including

  • The fiscal calendars of different nations.
  • Interest rates and money supply.
  • Rates of consumption and expenditures.
Take the month of July as an example. During July, the end of the 1st financial quarter in Japan coincides with the beginning of the second half of the year in the U.S. If USD/JPY is typically up during this period, some investors may interpret it as an instance of exchange rate seasonality.

Does Currency Seasonality Affect Exchange Rates?

While seasonality may have played a larger role in previous decades like the 1970’s and 80’s, subsequent recent adjustments in the behaviours of active traders and investors have mitigated the influence of seasonality in recent times.1 New technologies, theories, and economic practices have all begun to reduce the influence of exchange rate seasonality due to a more integrated financial system.

Do You Need To Factor In Exchange Rate Seasonality When Making a Transfer?

As stated above, recent research suggests the effect of seasonality is decreasing. And while it’s one thing to find a correlation that demonstrates USD/JPY is typically up over the end of the month of July compared to the beginning of the month, even if that trend ends up occurring often enough to make it statistically significant, it does not project accurate valuations of how much the currency is likely to appreciate over that time period. Therefore, the USD could be up .01% or it could be up 3%, and it could, of course, also be down on the one particular year that you need to send money overseas.

A more reliable way to protect your money transfer from adverse currency movements is to use products like Limit Orders or Forward Contracts to ensure you get the exchange rate you want, when you need it.

Sources:

  1. https://mpra.ub.uni-muenchen.de/30888/

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