End of Year Trend Changes in Forex

Since my interest in trading started in the futures markets, I was exposed to the value of using a calendar in my trading decisions.  I am not referring to an economic calendar where the news releases can influence market activity, but rather buying and selling certain futures contracts based on the month of the year.  Since the futures markets were dominated by agricultural products for years, trading by the calendar not only made sense, but was also profitable. 

With the introduction of the financial futures products in the early 70’s, futures traders continued to look at the calendar to see if there were any tendencies that could be taken advantage of in the trading pits.  One tendency was that the currency markets seemed to experience some major trend changes near the end of a calendar year.  There is not a trend change every year as it takes more than just a change of the year to change a trend in the FX markets. 

But when things did line up, a trend change seemed to take place at the end of a calendar year with enough frequency to be a factor in trading.  Below we have a weekly chart of the EUR/USD which shows what I would refer to as three major changes that took place in November or December of those years.  We can also see many minor trend changes that also occurred near the end of a calendar year. 

There could be many reasons for this including a change in opinion by major firms about the likely trend of a currency for the next year or changing spending patterns from one year to the next.  We can also see on this chart how falling interest rates in the US have resulted in a strong move up by the EUR/USD.   Since higher interest rates usually leads to a higher currency and lower interest rates usually leads to a lower currency, this makes perfect sense since the US is the only major country lowering interest rates. 

All of the other countries that make up the major currency pairs have been raising interest rates, which usually leads to a stronger currency.  But lately we have been hearing something different as other countries are starting to adopt a bias toward leaving rates alone or even lowering them.  This shift has resulted in some corrections in the pairs as the USD weakness has turned into some strength.  There are no guarantees that this is the start of a major trend change for the USD, but changing attitudes about interest rates and the end of a calendar year offers good reasons to be on the lookout for one. 

Thomas Long, FX PowerCourse Instructor
FXCM

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