Historically, the month of September has been a tricky one for the global financial markets. The Dow Jones Industrial Average (DJIA) has reported an average decline of 0.8% in September, since 1950. The median price return of the S&P index has been negative since 1928. But, what about the global currency markets? Let’s take a look.
The September Effect
The old adage most often used in the forex markets, “Sell in May and Go Away” still holds true, according to research data by S&P. The months from May to August, usually called the Summer Doldrums, are essentially the time when investors across the US and Europe go on holiday. Traders sell out their holdings in May and return to invest in September, to protect their portfolio and to enhance their returns.
A trading lull in the summer months leads to lower trade volumes and an erratic currency market. September brings with it a new surge in trading activities. Investors return from vacation to lock in gains and tax losses before the end of the year. Some even say that they liquidate investments to offset schooling costs for the fall semester. This results in high volatility in the forex market.
Trading Tips for September
High volatility in the forex markets is good for scalpers, who work best in such market conditions. They take advantage of frequent price fluctuations to quickly get in and out of trades, accumulating small profits with each trade that add up to a good sum at the end of the day.
European currencies such as the EUR, GBP, and CHF tend to move alongside the US dollar in September. The “Sell in May” concept is widely followed in the US and European equities market too, and these 4 currencies are heavily traded in these zones.
The volatility of major pairs doesn’t change much from August though. For instance, the GBP/USD tends to move higher towards the end of August. On the other hand, the USD/CAD tends to achieve highs at the end of August but declines as September approaches.
World Events to Watch Out For
The US dollar has continued to weaken through August 2018. It had sunk lower than the euro, Canadian dollar and even the Mexican peso in July. Oil prices are rising as a result.
But one month doesn’t define a trend. A tightened US monetary policy could result in favorable interest rate spreads, which would pull the dollar back up by the end of September. Moreover, if there is a return to risk aversion, due to the mid-term US elections, the world’s reserve currency could see growth.
Tariffs imposed by the US remain an issue for many countries. The Chinese yuan has lost 8% against the USD since April 2018. If the US goes on to impose sharp tariffs on Chinese imports, the yuan is likely to go further downhill. The US-Canada trade dispute also remains to be resolved. Until then, the USD/CAD pair will be volatile. A trade deal between Washington and Ottawa doesn’t seem likely this year. And, until that happens, the USD/CAD is unlikely to flourish.
Whether it is the slow summer months or the return of traders in September, the key to trading successfully is to remain abreast of developments worldwide and to use all the tools available to analyze the market before making a trading decision.