US Dollar Tipped to Rise in May, as is Tradition

At the beginning of April we reported that the British Pound tends to appreciate in April. It is something of a tradition it would seem.

For the last 12 years without fail, GBP has rallied against the USD with an average monthly gain of 2.2%.

While some analysts suggested this April would be different, the UK currency has so far put in a performance against most G10 majors that would suggest it looks set to stick with tradition.

Above: Seasonality can be a powerful predictor of currency movement, as the Pound has shown.

Ahead of the month of the new month, we can report that the US Dollar has a similar relationship with the month of May.

“Economic momentum has the potential to shift to neutral from bearish for the dollar in the coming weeks,” Meera Chandan at J.P. Morgan who flagged up the notion that the Dollar could appreciate in May based on past performances.

Since the start of 2017 the Dollar has broadly under-performed its major rivals as markets feared Donald Trump would be unable to fully deliver on his pro-USD policy agendas.

However, a slowdown in US economic activity has also played a part and it is possible to attribute part of the recent undershoot in Dollar performance to a softening in US activity data relative to the rest of the world.

“There has been a seasonal element to this undershoot in recent years with US data typically softening in Q1 and then stabilising in Q2, which also translates to seasonality in the Dollar,” says Chandan.

Specifically, the USD Trade Weighted Index has increased in May in each of the last five years by an average of 2.1% and seven out of the last ten years by an average of 1.0%.”

“This seasonality, combined with low US rates (market prices in only two rate hikes by Fed by end of 2018) and cheap USD valuations vs. rates has the potential to lend the dollar some upside currencies near-term,” says Chandan.

But, where the Dollar will appreciate remains another question altogether.

Recall that the Trade Weighted Index is a measure of broader Dollar performance against a basked of currencies; picking where the strong performance will come is a little difficult.

But Chandan suspects that with the growth backdrop remaining supportive for high ‘carry currencies’ - i.e the Australian & New Zealand Dollars and emerging market currencies - the US Dollar might have to look elsewhere for strength.

“Perhaps USD outperformance in May could be limited to low yielders,” says Chandan.

The Pound, Euro and Yen are therefore put on notice.