US dollar Q4 strength
The value of the US dollar, like any other currency, is influenced by a complex interplay of economic, political, and market factors. While there is no fixed rule that the US dollar must go up during the last quarter of the year, there are some reasons why it might strengthen during this period:
Seasonal Factors: Due to various seasonal factors, some industries and businesses tend to increase their demand for US dollars in the last quarter of the year. For example, the holiday shopping season typically leads to increased imports of goods into the United States, which can create demand for dollars to facilitate these transactions. These seasonal factors during Q4 have created a historical 15-year pattern of higher prices for the USDX.
Source: Moore Research Center, Inc. (MRCI)
Year-End Repatriation: Companies with overseas operations may repatriate profits back to the United States at the end of the year for tax and financial reporting purposes, supporting an increased demand for US dollars.
Market Sentiment: Market participant's sentiments and expectations can significantly influence currency movements. Suppose they anticipate that the US economy will perform well in the coming year or view the US dollar as a haven during global uncertainty. In that case, they may buy more US dollars, increasing its appreciation.
Interest Rates: Central banks, such as the Federal Reserve, can influence currency values through changes in interest rates. If the Federal Reserve raises interest rates during the last quarter of the year, it can attract foreign capital seeking higher yields, boosting demand for the US dollar.
Economic Data: Economic data releases and announcements, such as GDP growth, employment numbers, and inflation data, can impact currency markets. The recent Non-Farm payroll number increased by 336K for September, exceeding the upwardly revised August number of 227K. Market expectations were for 170K, causing excessive volatility when the report was released. The report sent the 10-year treasury yields soaring to 4.8% while trading at 16-year highs. The Federal Reserve has a reason to maintain its hawkish interest rate stance, and the odds of a .25-point hike before year-end have increased from several weeks prior. The US Dollar bulls ran with these numbers.
It's essential to note that currency markets are highly complex and can be influenced by many factors, which can change rapidly. While there may be tendencies for the US dollar to strengthen during certain times of the year due to the aforementioned factors, it is not a guaranteed occurrence, and the currency's value can fluctuate for various reasons. Traders and investors closely monitor these factors and adjust their strategies and risks accordingly.
US Dollar Index components
The US Dollar Index (USDX) measures the value of the United States dollar relative to a basket of foreign currencies. It was created in 1973 by the US Federal Reserve to provide an objective and consistent way to evaluate the strength or weakness of the US dollar in the foreign exchange market. The USDX comprises six major world currencies, weighted against the US dollar. The US Dollar Index and its respective weightings:
Euro (EUR) - 57.6% weight
Japanese Yen (JPY) - 13.6% weight
British Pound Sterling (GBP) - 11.9% weight
Canadian Dollar (CAD) - 9.1% weight
Swedish Krona (SEK) - 4.2% weight
Swiss Franc (CHF) - 3.6% weight
These weightings are periodically adjusted to reflect changes in the importance of various currencies in global trade and finance. The EUR, the most significant component, has the most prominent weight in the index. Due to the weight the EUR carries, 57.6% in the USDX, there is an inverse correlation between the two. As the USDX strengthens, the EUR will decline, and vice-versa.
Using the Euro to participate in the US dollar strength
Trading the euro currency (EUR) can be attractive for various reasons. Like any other currency, trading the EUR carries advantages and risks, and it's essential to understand these factors before trading. Here are some reasons why people trade the EUR:
Liquidity: The EUR is one of the most traded currencies globally, and the forex market for EUR is highly liquid. This liquidity means you can easily buy and sell euros at any given time, making it an appealing choice for traders.
Forex Market Hours: The forex market operates 24 hours a day, five days a week, allowing traders to participate in EUR trading at almost any time, depending on their preferred trading session.
Volatility: The EUR can experience significant price movements, creating opportunities for traders to profit from short-term and long-term trends. However, this volatility can also increase risk.
Forex & Futures Market Access: Access to these markets has become more accessible in recent years due to technological advancements. Online platforms and brokers make it relatively easy for individuals to participate in EUR trading.
Hedging: Businesses and market participants often use the EUR to hedge against currency risk. For example, a company exposed to the Eurozone might use euro futures or options to protect against unfavorable exchange rate movements.
EUR seasonal pattern for placing your bets
MRCI research (not a recommendation) has found a seasonal pattern to sell the EUR shortly after the beginning of Q4. The results of this pattern have revealed that in 14 out of the past 15 years, the EUR has closed lower in the vicinity of November 12 than on October 20. That's a 93% historical occurrence. Additionally, five of those 15 years never had a daily closing drawdown. The optimal seasonal window is open for approximately 24 calendar days, plus or minus a few days.
Source: MRCI
After the recent down move, the EUR could see a short-term rally into the MRCI seasonal window (yellow.) The 15-year historical pattern (blue line) also indicates a possible short-term rally.
In closing
Additionally, technical analysis can be valuable for identifying entry and exit signals. Traders may use moving averages, trend lines, and oscillators to gauge the Euro's momentum and determine optimal points to enter or exit a trade.
It is important to note that this seasonal trade in the Euro currency futures or the EUR forex markets comes with inherent risks. Market conditions can change rapidly, and unexpected events can disrupt seasonal patterns. Traders should conduct thorough research, closely monitor market conditions, and implement appropriate risk management techniques to minimize potential losses. While seasonal patterns have performed well historically, there is no guarantee of future success.
Traders wishing to participate in this setup could consider using the spot forex market trading the EURUSD or the futures market trading the standard-contract 6E (Barchart E6) contract or the micro-contract M6E (Barchart MF.)
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
