It’s that time of the year, forex junkies. That’s right, put on your NSYNC hats because it’s gonna be May!
What the heck does the phrase “sell in May and go away” mean and can it translate to forex trade opportunities this year? Here are points that you need to know:
What the heck does “Sell in May and Go Away” mean?!
The phrase, used more widely in the equities markets, refers to traders cashing in their investments ahead of the summer months (usually June to August). With traders out on vacations, the months following May usually see significant drops in trading volume.
This creates a self-fulfilling prophecy of selling in May followed by months of low volume (and sometimes low volatility) trading, which is why it’s better for most traders to just “go away.” The occurrence is first observed in the U.S. markets but has since been noticed in Canadian and European markets as well.
How does this apply to forex trading?
Traders cashing in on their high-yielding investments means more activity for the major currencies. And with the bulk of traders selling dollar-denominated assets, mass profit-taking could mean more demand for the dollar.
How can forex traders get some of the action?
Let’s take a look at how the major currencies fared against the low-yielding Greenback for the past five years. Based on the chart below, we can identify at least 3 occurrences that can translate to forex trade ideas:
1. It’s 5/5 for the Dollar Index
Over the last five years the dollar index (USDX), a measure of the dollar’s performance against a basket of currencies, has always ended the May month in the green.
The index saw its highest gains in 2012 and has an average gain of around 2.60%.
Looks like there’s still merit in the idea that traders would take off their dollar-denominated asset investments ahead of the summer months!
2. Comdolls are particularly susceptible to profit-taking
As you can see, commodity-related currencies like the Aussie, Loonie, and Kiwi usually present the more consistent correlations to USDX.
One possible explanation for this is that comdolls have some of the highest interest rates in the hood, which make them vulnerable to wide scale profit-taking.
Another possible reason is that their correlations to commodities – which are also high-yielding – make them even more responsive to profit-taking. Taking off your long oil bets, for example, would not only increase the demand for the dollar, but also drag on oil prices.
Also, is it just me or is the Aussie more in tandem with the Loonie than the Kiwi? Is it because the same guys who are trading commodities like gold are also playing oil?
Oh, and I think it’s equally (if not more) important to note that the comdolls have the most volatile price action among the high-yielding against the dollar during the month.
3. CHF has lost pips in each of the last five years
The last time the franc gained pips on the dollar was in 2011. Coincidentally, that’s also the last May for then Swiss National Bank (SNB) Governor Philipp Hildebrand before Thomas Jordan replaced him as head honcho in April 2012. Coincidence? I think not!
So should I buy the dollar this month?
Not so fast. There’s no such thing as a sure thing, after all. Just ask the cast of La La Land. See, several factors could still shake up the forex scene in the next couple of months:
Monetary policy speculations
Thanks to recent disappointments in Uncle Sam’s economic reports, forex traders have adjusted their rate hike expectations from the Fed. Instead of expecting another rate hike in May, many are now speculating that the next bump will be in June.
Ditto for the ECB, which has its hands tied by France’s Presidential elections. Word around the hood is that Mario Draghi and his gang would wait for a couple more reports to come in and France to choose its next leader before they start to taper their monetary stimulus.
French elections
This is pretty self-explanatory. I mean, have you seen the euro’s weekend gaps?!
Pollsters have Macron leading by a thin margin against Le Pen in the second round of voting, so we still can’t discount the possibility of an upset on May 7.
If Le Pen pulls a Trump and becomes France’s next President, then we could be looking at widespread risk aversion as traders expect Le Pen to start her Frexit campaign.
On the other hand, if Macron once again takes the top spot, then we could see another relief rally that would boost the euro and risk appetite across the markets.
Trump’s next policy moves
What’s a trading quarter without Trump, right? Traders recently shrugged off Trump’s tax plans, but that doesn’t mean that they won’t pay attention to what he does next.
Will he provide details on his tax plans? Or will he escalate trading tensions against Uncle Sam’s largest trading partners? Or maybe he’ll start a war with North Korea? Who knows!
OPEC’s production cut deal
With the OPEC production cut deal expiring in June, all eyes will be on the participants to see if they’re game for another round.
Players like Saudi Arabia and Kuwait are jawboning their hearts out ahead of the meetings in June, but you can bet your pips that forex players will also watch out for what the other oil producers have to say!
Remember that even though there’s no guarantee of where the markets are going, a risk-averse trading in May is one of the probabilities that forex traders can take advantage of in the next few weeks.
In any case, make sure you have your plans in place before you enter any trades!
