Thoughts from the Trading Trenches
23 Years ago | February 01, 2014 12/2/23, 12:00 AM
In the February issue:
EURUSD January Effect: Fact or Fiction?
Typically at this time of year the outlook is pretty well set but this year started out with a focus on Fed tapering, signs of a slow economic start and selling pressure on emerging markets creating a risk off sentiment and a run for cover, This saw the EURUSD resist the downside for most of January until succumbing to end of month pressures to end it on a weak note and down 2.1% from the 2013 close. Consensus forecasts, meanwhile, are calling for a weaker EURUSD this year although we saw similar views at this time last year and we all saw how the common currency upset those predications. In any case, at this time of year it pays to look at the January range and explore whether the January Effect is fact or fiction and what influence it may have.
The January Effect
The history of the EURUSD has shown that the high or low for the year often occurs during the month of January. As the table below shows, since 1999, when the EURO was launched, the high or low for year was set in January in 8 out of 15 years. However, if 2002 and 2011 are included, the January Effect occurred in a more convincing 10 out of 15 years (note in 2002 the low was set on Feb 1 and only by 9 pips so close enough to be included as a January effect. In 2011, the January low held until just before yearend on December 29, when it was extended by just 21 pips so that can be included as well). Other exceptions were in 2004, 2008, 2009, 2012 and 2013 (4 out of the past 6 years or 5 out of the past 6 years including 2011). However, the years 2008 and 2009 were during the global financial crisis and start of the dig out so this could be the result of extraordinary factors and as indicated, in 2011 the January Effect stayed intact until just before yearend.
|
Year |
January Range |
Year Range |
Low/High Set in Jan |
|
1999 |
1.1346-1.1885 |
.9995-1.1885 |
High |
|
2000 |
.9667-1.0412 |
.8228-1.0412 |
High |
|
2001 |
.9118-.9570 |
.8345-.9570 |
High |
|
2002 |
.8574-.9665 |
.8565-1.0504 |
Low* |
|
2003 |
1.0333-1.0905 |
1.0333-1.2649 |
Low |
|
2004 |
1.2352-1.2899 |
1.1762-1.3670 |
Neither |
|
2005 |
1.2922-1.3581 |
1.1640-1.3581 |
High |
|
2006 |
1.1812-1.2325 |
1.1812-1.3370 |
Low |
|
2007 |
1.2877-1.3291 |
1.2877-1.4908 |
Low |
|
2008 |
1.4366-1.4798 |
1.2331-1.6040 |
Neither |
|
2009 |
1.2765-1.4050 |
1.2458-1.5144 |
Neither |
|
2010 |
1.3863-1.4582 |
1.1878-1.4582 |
High |
|
2011 |
1.2875-1.3759 |
1.2856-1.4939 |
Low* |
|
2012 |
1.2623-1.3233 |
1.2041-1.3486 |
Neither |
|
2013 |
1.2995-1.3594 |
1.2744-1.3821 |
Neither |
|
2014 |
1.3478-1.3775 |
|
|
So is the January Effect fact or fiction?
Looking at the above table suggests the pattern has lost some steam but this does not mean it cannot be a factor in trading. Arguing against a January Effect is the fact that it has not occurred during the past two years (three if 2011 is included). On the other side, there is an opening year gap that remains on the EURUSD upside and if not filled, the market will assume the high for January may be the high for the year unless proven otherwise. In addition, the January range this year has been the tightest since the launch of the EURO in 1999, which argues for at least one side being broken.
In any case, the January range is still important and if one or the other side holds, then talk will increase that there may be a January Effect this year and that could influence medium term sentiment. Currently, there is a much better chance that the January high will hold than the low, which should support the consensus forecast.
Key event risks to start February: ECB meeting, U.S. January employment report
Jay Meisler
Founder, Global Traders Assocation
Jay Meisler is the founder of the Global Traders Association, the advocate for the global trader and a co-founder of Global-View.com, the leading forex discussion site for more than a decade and home of the original forex forum.
