From the March 2014 issue of Futures Magazine • Subscribe!

The January Effect in currencies

Does January performance serve as a reliable predictor for the rest of the year? According to our 20-year data (from 1994 to 2013), the best and worst performing currencies in January generally have replicated their performances for the rest of the year. In 16 of the last 20 years the pattern was notable. Only four years: 1998, 2002, 2009 and 2011,  had no noticeable pattern from the January Effect.

2013: There was a remarkable January/full-year similarity for the euro, which was the top performer in both periods. Increased market confidence in European Central Bank (ECB) commitment to stability, falling bond yields and lack of quantitative easing helped boost EUR. The Japanese yen (JPY) was the worst performer in January and the year following the printing commitment of the Bank of Japan.

2012: The New Zealand dollar (NZD)(CME:N6) was the top performer in January and the year, partly due to prolonged central bank hawkishness and a 14% increase in dairy prices. On the flipside, the U.S. dollar (USD) and JPY were the worst performers for the month and year. This was similar to 2009 as traders fled these two low-yielding currencies for higher yielding currencies and less stimulative policies.

2011: Here is the exception to prove the rule as there was no relationship between January and the rest of the year.

2010: JPY and the Aussie dollar (AUD) performed well in January and on the year while EUR and the Danish kroner (DKK) were the worst performers in January and the year. The eruption of the Eurozone debt crisis sent EUR to the bottom in 2010 and 2011, as well as  Scandinavian currencies,  as these were exposed to EUR-dependent Baltic nations.

2009: This was an outlier. A possible reason was the contrast between the “ugly” January in financial markets and the second half of the year, when equities rebounded aggressively following the asset purchases from the Fed and Bank of England.

2008: JPY performed in January and the rest of the year as deleveraging in global markets prompted violent repatriation into the Japanese currency. The Canadian dollar (CAD) and British pound (GBP) were among the weakest currencies in January and for all of 2008.

2007: CAD and the Norwegian Krone (NOK) led in January and for the year while there was no evident link for the underperformers.

2006: The Swedish krona (SEK) and GBP jumped out of the gate due to hawkish policies, while USD, JPY and CAD were underperformers in January and the year.

2005: Strong year for USD and gold. SEK, DKK and the Swiss franc (CHF) sunk early and often.

2004: NZD was the top performer in January and  the year. No clear relationship was seen from the underperformers.

2003: The commodity currencies: AUD, NZD and CAD, were the strongest currencies in the first month as well as the rest of the year. JPY, USD and NOK were at the bottom in January and for the year.

2002: This was a poor year for the January effect, but NZD was the second best performer in January and the year.

2001: USD and NOK were the strongest currencies in January and for 2001. JPY was the second worst performer of the month and weakest currency of the year. 

2000: CAD and USD emerged as the top performers in January and were two of the three strongest currencies of the year as North America amassed most of the economic gains from the technology boom. JPY was the worst in January and third weakest currency for the year.

1999: AUD and CAD were two of the top three currencies in January and top four best performers for the year. EUR and CHF were in the bottom three for January as well as for the year.

1998: AUD was the top January performer but among the worst currencies of the year. Yet, JPY was the second best performer that month and top gainer for the year. The 1998 crash in Asian currencies prompted sharp repatriation into the yen.

1997: CAD and USD were the top two performers in January and for the year. The U.S. economy led the world recovery in technology.

1996: NZD and AUD led in January and were in the top three for the year, while CHF finished last in January and  the year.

1995: CHF was the best performer in January as well as for the year, while AUD was the worst performer in January and second worst for the year.

1994: CAD and USD started badly and ended badly. The bond crash of 1994 weighed on U.S. markets as well as Canada. AUD and CHF were among the top performing currencies in January and the year.

2014?

In January 2014, the worst performing currency was clearly CAD as disappointing data and dovish remarks from the Bank of Canada suggested the possibility of easing monetary policy. In contrast with the Fed and Bank of England, the Bank of Canada dropped its hawkish bias and is already hinting at easing this year. The yen was the best performing currency in January. 

Ashraf Laidi is Chief Global Strategist at FX Solutions/City Index, founder of AshrafLaidi.com and author of “Currency Trading & Intermarket Analysis.”

About the Author

Ashraf Laidi is chief global strategist at City Index-FX Solutions and author of “Currency Trading & Intermarket Analysis.” His Intermarket Insight appears daily on AshrafLaidi.com.

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