What is the January effect in currencies

Does January performance serve as a reliable predictor for the rest of the year? According to our 20-year data (from 1994 to 2013), the best and worst performing currencies in January have generally replicated their performances for the rest of the year. In 16 of the last 20 years the pattern was notable. Only 4 years (1998, 2002, 2009 and 2011) had no noticeable pattern from the January Effect.

In 2013: there was a remarkable January-full year similarity for the EUR and DKK, which were the top performers in both periods. Increased market confidence in ECB commitment to stability, falling bond yields and lack of QE helped boost EUR. JPY was the worst performer in January and on the year following the printing commitment of the Bank of Japan.

In 2012, NZD was the top performer in January and on the year, partly due to prolonged RBNZ hawkishness and a 14% increase in dairy prices. On the bottom league, USD and JPY were worst performers for the month as well as on the year. This was similar to 2009 as traders fled these two low-yielding currencies for higher yielding currencies and less stimulative policies.

2011 showed no relationship between January and the rest of the year.

2010 showed January and yearly strength for JPY and AUD, while EUR and DKK were the worst performers in both month and year. The explosion of the Eurozone debt crisis sent EUR in the bottom of the league in 2010 and 2011, sending Scandinavian currencies alongside it, as these were exposed to EUR-dependent Baltic nations.

2009 showed no relationship between January and yearly performance in currencies. A possible reason to this is the contrast between the “ugly” January in financial markets, which was equally dismal for higher yielding commodity currencies, and the 2nd half of the year, when these currencies rebounded aggressively following the asset purchases from the Fed and BoE.

2008 showed a stellar JPY performance in January and rest of the year as deleveraging in global markets prompted violent repatriation into the Japanese currency. CAD and GBP were among the weakest currencies in January and for all of 2008.

2007 linked January strength in CAD and NOK to that of the entire year, while there was no evident link for the underperformers.

2006 saw consistent strength for SEK and GBP in January and on the year due to their hawkish policies, while USD, JPY and CAD were underperformers in January as well as on the year.

2005 was a strong year for USD and gold. SEK, CHF and DKK were in the bottom in January as well for the whole year.

2004 saw NZD as the top performer in January and on the year. No clear relationship was seen from the underperformers.

2003 showed strong evidence of a January currency effect as AUD, NZD and CAD were the strongest currencies in the first month as well as the rest of the year. JPY, USD and NOK were in the bottom 3 on the month and on the year.

2002 was a poor year for the January effect, but NZD was the 2nd best performer in January and of the whole year. 2002 was the first year in the USD’s 5-year bear market.

2001, USD and NOK were the strongest currencies in January and in all of 2001. JPY was the 2nd worst performer of the month and weakest currency of the year. As most global markets collapsed on the tech bust, USD as in the process of picking up the pieces as the Dow and S&P500 benefitted from “old economy” stocks.

2000 saw CAD and USD emerging as the top performers in January and 2 of the 3 strongest currency of the year as the North American amassed most of the economic gains from the technology boom. JPY was the worst in January and 3rd weakest currency on the year.

1999 saw the AUD and CAD were the 2nd and 3rd strongest currencies in January, and 3rd and 4th best performers for the year. EUR and CHF were in the bottom 3 for January as well as for the rest of the year as the single currency struggled with an overvalued opening value at its inception and prolonged Eurozone weakness.

1998 saw AUD as the top January performer but among the worst currencies of the year. Yet, JPY was the 2nd best performer that month and top gainer on the year. The 1998 crash in Asian currencies prompted sharp repatriation into the yen, following excessive selling in the Japanese currency earlier in the year.

1997 was the year when CAD and USD, were the top 2 performers in January as well as the rest of the year. This was explained by the fact that the US economy led the world recover in technology and from escalating capital flows, which led to positive spillovers onto its northern neighbour.

1996 pushed NZD and AUD at the top of the league in in January as well as among the top 3 currencies for the full year, while CHF finished last in January and on the year.

1995, CHF was the best performer in January as well as for the whole year, while AUD was the worst performer in January and 2nd worst performer on the year (just behind JPY).

1994 saw the CAD and USD as the worst performing currencies in January as well as the rest of the year. The bond crash of 1994 weighed on US markets as well as Canada, particularly on Mexico. AUD and CHF were among the top 4 performing currencies in January and were also among the top performers of the year. CHF gained as investors fled safe haven from the EM currency collapse.

What’s for 2014?

In January 2014, the worst performing currency was clearly the CAD as disappointing data and dovish remarks from the Bank of Canada suggested the possibility of easing monetary policy. In contrast with the Fed and Bank of England, the BoC is the central bank has dropped its hawkish bias and is already hinting at easing this year. The yen was the best performing currency in January –thus, the most likely scenario for the currency to outperform into the rest of the year is prolonged declines in equities to the extent of a massive decline in risk appetite. Considering our expectations for th enext sell-off to intensify in late April, chances of deepening losses in equities extending into summer-end may well send the yen back to the top rank of performing currencies.