Currency seasonality’s slow comeback?

Olivier Desbarres

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Report Contents

( 12 mins)

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates (NEERs) going back to January 2010, using over two million daily data points with trade-weights derived from the BIS (April 2019) and national central banks (see Nominal Effective Exchange Rates: Monthly seasonal patterns, 10th January 2019).

A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. Identifying monthly seasonal patterns and why they may break down (significant changes in central bank or government policy, market positioning, macro data surprises and unexpected domestic events) can thus potentially augment investment returns and generate alpha.

Unsurprisingly the Covid-19 pandemic – a once-in-a-lifetime “black swan” event – and accompanying measures such as national lockdowns severely disrupted typical monthly seasonal currency patterns in 2020, particularly in March and June (the trough and peak in global risk appetite) but also in Q4, with a few exceptions (see Monthly currency seasonality: Down and out?, 4th January 2021).

A number of emerging and developed market currencies continued to deviate from their 2010-2019 historical patterns in January 2021. In particular the “normally” strong Brazilian Real and to a lesser extent Colombian Peso and Polish Zloty depreciated. The Swiss Franc, contrary to history and in line with our forecast, also weakened slightly. The South African Rand depreciated 2.1%, five times as much as its 11-year historical average.

Conversely the “normally” weak Turkish Lira was the outperformer, with the NEER appreciating nearly 4%. Sterling, the Australian Dollar and Norwegian Krone also outperformed in January relative to their historical seasonal patterns.

However, and while early days, about 17 currencies, including the Dollar, Euro, Kiwi Dollar, Mexican Peso and most Asian currencies performed in line with their historical seasonality.

Based on 2010-19 data Thai Baht, Norwegian Krone, Hungarian Forint and Polish Zloty were strongest currencies in the month of February while Korean Won was the weakest.

 

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates (NEERs) going back to January 2010 (i.e. 133 months), using over two million daily data points, with trade-weights derived from the April 2019 Bank of International Settlements (BIS) report and national central banks (see Nominal Effective Exchange Rates: Monthly seasonal patterns, 10th January 2019). Please see APPENDIX for a more detailed analysis of NEERs, our methodology and of currency seasonality

Unsurprisingly, typical monthly seasonal currency patterns broke down in 2020, with a few exceptions. In particular, when global risk sentiment collapsed in March and peaked in June only a handful of currencies moved broadly in line with their historical patterns. Historical seasonal patterns somewhat re-established themselves in Q3 (notably August) with domestic factors once again driving asset prices, including currencies. But the resurgence in Covid-19 cases and deaths in Q4 along with the re-imposition of national lockdowns once again contributed to a breakdown in historical seasonal patterns, albeit not as marked as in March or June (see Monthly currency seasonality: Down and out?, 4th January 2021).

 

Currency seasonality’s slow comeback? 1

 

Many major currencies continued to deviate from historical seasonality in January 2021

A number of emerging and developed market currencies continued to deviate from their 2010-2019 historical patterns in January 2021 according to our calculations. At one extreme, the “normally” strong Brazilian Real and to a lesser extent the Colombian Peso and Polish Zloty underperformed markedly (see Figures 1 & 3).

  • The Brazilian Real NEER, which on average appreciated about 1.0% (1.6 standard deviations) in January between 2010 and 2019 and depreciated only 1.3% (0.9 SD) in January 2020 depreciated about 3.4% (2.2 SD) in January 2021.
  • The Colombia Peso NEER, which on average appreciated 1.3% (1.8 SD) in January between 2010 and 2019 and appreciated 1.1% (1.5 SD) in January 2020 depreciated about 0.6% (0.5% SD) in January 2021.
  • The Polish Zloty NEER, which on average appreciated about 0.3% (0.5 standard deviations) in January between 2010 and 2019 and in January 2020, depreciated about 1.5% (2.3 SD) in January 2021.

 

The South African Rand also underperformed significantly in January 2021, with the NEER depreciating about 2.1% (1.7 SD). In comparison, it depreciated only 0.4% (0.3 SD) on average in January between 2010 and 2019 and in January 2020.

 

Currency seasonality’s slow comeback? 2

 

The Swiss Franc, contrary to history, also weakened slightly in January. Between 2010 and 2019 the Swiss Franc NEER on average appreciated 0.7% in the month of January (1 SD) and appreciated 1.2% in January 2020 (about 1.6 SD) which we partly attribute to the timing of the Swiss alpine holiday season (and foreigner buying Swiss Franc ahead of their vacations). However, the average Swiss Franc NEER in January 2021 was about 0.1% lower than in December 2020 and end-month to end-month the Swiss Franc NEER depreciated about 0.2% (see Figure 3).

This was in line with our forecast that “[…] travel restrictions and domestic quarantines will severely limit the number of tourists who are able and willing to holiday in Switzerland in coming weeks and months. As a result the Swiss Franc may appreciate far less in January 2021 than it has typically done in the month of January or even depreciate,. Finally we note that the Swiss Franc NEER is currently trading broadly in the middle of a narrow 1.6% range in place since 10th June. The odds of the Swiss Franc appreciating or depreciating in January 2021 are pretty evenly balanced, in our view, and likely to be conditioned by global risk sentiment” (see Monthly currency seasonality: Down and out?, 4th January 2021).

 

At the other end of the spectrum, the “normally” weak Turkish Lira was the outperformer in January (see Figures 1 & 3). Similarly, albeit to a far lesser degree, the Australian Dollar, Norwegian Krone and Sterling, also outperformed in January relative to their historical seasonal patterns.

  • The Turkish Lira NEER on average depreciated 1.4% (0.7 SD) in the month of January between 2010 and 2019 and also in January 2020, according to our estimates, it appreciated nearly 4% (a massive 29 SD) in January 2021
  • The Sterling NEER appreciated 1.3% (2.5 SD) in January 2021, thanks in part to the UK and EU agreeing in late-December on a Brexit deal, in line with our forecast, and the UK’s (so far) successful Covid-19 vaccination program (see Time is priceless but has a steep cost, 25th November 2020). In comparison Sterling on average depreciated 0.2% (0.4 SD) in the month of January between 2010 and 2019 and also in January 2020, according to our estimates.
  • The Australian Dollar NEER on average appreciated 0.2% (0.3 SD) in the month of January between 2010 and 2019 and depreciated 0.9% (1.2 SD) in January 2020. In comparison it appreciated 1.9% (3.7 SD) in January 2021. We partly attribute the Australian Dollar’s underperformance in January 2020 and outperformance in January 2021 to the relative weakness and strength during those periods of China’s economy (Australia’s largest trading partner). Australia’s success in bringing down new Covid-19 cases to negligible numbers has also likely contributed to the currency’s rally in the past three months, in our view.
  • The Norwegian Krone NEER on average appreciated 0.3% (0.9 SD) in the month of January between 2010 and 2019 and 0.7% (2 SD) in January 2020. In comparison it appreciated 1.9% (5.1 SD) in January 2021.

 

 

Some signs that EM and developed currencies reverting back to seasonal patterns

However, about 17 currencies, including the US Dollar, Euro, Kiwi Dollar, Russian Rouble, Mexican Peso and most Asian currencies performed in line with their historical seasonality (see Figures 1 & 3).

Monthly seasonality in emerging Asian currencies has historically been modest, with the month of January no exception (see Figures 1 & 4). We attribute this in large part to Asian central banks’ ability and willingness to actively manage their currencies (including via FX intervention) in a bid to limit volatility and cap directionality. Even throughout 2020 these currencies on the whole deviated far less from their monthly historical patterns than most other major EM and developed market currencies, which again we ascribe to the more interventionist stance of their central banks. We see few reasons for this to change near-term.

It is arguably too early to tell with any certainty whether going forward currencies will continue to revert back to their historical monthly seasonal patterns. The evolution of the Covid-19 pandemic and pace of vaccination programs at a national level will continue to have a strong bearing on the speed at which social distancing restrictions are lifted. This will, along with the matrices of domestic fiscal and monetary policies, likely carry on influencing economic growth rates and currencies’ paths, in our view. However, January 2021 data suggest that currencies which were out-of-kilter throughout most of 2020 may be slowly reverting to somewhat more “predictable” seasonal patterns.

 

Currency seasonality’s slow comeback? 3

 

Currency seasonality’s slow comeback? 4

 

Possible seasonal winners and losers in February 2021

Based on 2010-2019 data the NEERs to record the strongest average rates of appreciation in the month of February were the Thai Baht, Norwegian Krone, Hungarian Forint and Polish Zloty (see Figure 4).

  • Thai Baht NEER appreciated about 0.8% which was equivalent to about 1.4 standard deviations (i.e. the Baht’s appreciation was statistically significant) – see Figure 5. The Baht NEER appreciated in nine out ten months between 2010 and 2019 although it weakened 1.8% in February 2020.
  • Norwegian Krone NEER also appreciated about 0.8% (2.2 SD) on average, having appreciated in seven out of ten months between 2010 and 2019 and been broadly unchanged in two months. It weakened 2.2% in February 2020. However, as we note above the Krone outperformed in January 2021 and appreciated three months in a row which may limit its upside near-term, in our view.
  • Hungarian Forint NEER appreciated about 0.7% (2 SD) on average, although its performance in February has been somewhat more erratic than the Thai Baht’s and Norwegian Krone’s.
  • Polish Zloty NEER also appreciated about 0.7% (1.2 SD) on average. The scope for Zloty appreciation could in theory be even greater given that the currency underperformed in January 2021 as noted above.

 

Currency seasonality’s slow comeback? 5

 

Conversely, the Korean Won recorded the strongest average rate of depreciation in the month of February. The Won NEER between 2010 and 2019 on average weakened about 0.4% (or 1.2 SD) and weakened 1.2% in February 2020.

 

APPENDIX

The Nominal Effective Exchange Rate (NEER) is a trade-weighted average of nominal bilateral rates between a country’s currency (e.g. the Dollar) and the currencies of this country’s main trading partners (in the case of the United States, namely the Chinese Renminbi, Euro, Mexican Peso, Canadian Dollar, Japanese Yen, Korean Won and Sterling). For this reason the NEER is also referred to as the Trade Weighted Index (TWI). Please see Figure 6 for details about our calculations Methodology.

 

Currency seasonality’s slow comeback? 6

 

Most (if not all) studies of currency seasonality tend to focus on crosses versus the Dollar (e.g. EUR/USD, USD/JPY) as they are amongst the most actively traded crosses. Moreover, in many cases the Dollar has a large weight in currencies’ NEERs as the United States is a major trading partner for many economies (for example the Dollar has a 54% weight in the Mexican Peso NEER according to the BIS).

However, that is not always the case. For example, the Dollar accounts for only 13% of the Thai Baht NEER. So while the Thai Baht may be seasonally weak versus the Dollar in a particular month, the Thai Baht NEER may be seasonally strong that month if its other, more heavily-weighted constituent currencies, including the Chinese Renminbi and Japanese Yen, are even weaker versus the Dollar that month. Put differently if the Thai Baht tends to appreciate versus the Dollar in a particular month this may tell us more about the Dollar’s seasonality than the Thai Baht’s.

Ultimately the NEER provides a more accurate overall picture (than the exchange rate versus the Dollar or other individual currencies) of a country’s currency and trade competitiveness and of the risks of imported inflation/deflation. Therefore, central banks particularly in open economies (including the People’s Bank of China) arguably attach greater importance to the NEER when setting monetary policy (see PBoC likely to keep Renminbi on tight leash, 22nd October 2020, and Far more to Renminbi than USD/CNY cross, 8th December 2020). The Monetary Authority of Singapore (MAS) explicitly targets the Singapore Dollar NEER, keeping it in an undisclosed band.

A number of factors can drive monthly currency seasonality, including (sometimes well known) underlying seasonal patterns in a country’s balance of payments (e.g. exports/imports, tourism receipts, worker remittances and capital flows) which themselves could be due to the timing of public holidays and the depth of market liquidity. However, even well established seasonal patterns of monthly outperformance or underperformance can break down due to significant changes in government or central bank policies, electoral cycles, major domestic events (e.g. Brexit related development for Sterling, terrorist attacks), hard to predict “acts of god” (e.g. earthquakes) and of course once-in-a-lifetime “black swan” events such as the Covid-19 pandemic which has swept our planet since January 2020.