Fixed Income Research & Macro Strategy (FIRMS) – 10 January 2019
- This report examines the monthly seasonal patterns of 32 major Nominal Effective Exchange Rates (NEERs) going back to January 2011, using 76,600 daily data points.
- The NEER provides a more accurate overall picture (than the exchange rate versus the Dollar or other individual currencies) of a country’s currency and trade competitiveness and risks of imported inflation/deflation and is therefore an important policy input for central banks, particularly in open economies.
- A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. However, major domestic or international events (e.g. Brexit) or significant changes in central bank or government policy can break down even well established seasonal currency patterns.
- Between December 2010 and December 2018 the Dollar NEER recorded the fastest pace of appreciation (27%). Five of the next six strongest currencies are low-yielding Non-Japan Asia currencies. The Swiss Franc posted the fourth largest gain (14%). Commodity currencies – Norwegian Krone and Canadian and Australian Dollars – all depreciated 20%.
- Over the past eight years, the Brazilian Real NEER has been the strongest currency in January, appreciating on average by 1.4% mom, with the Colombian Peso in second place (+1.3% mom). Conversely, the Argentine Peso has been the weakest currency in January, depreciating on average by close to 5% mom.
- The Dollar NEER has been weakest in the month of April and more broadly in February-April when on average it has weakened 0.4% mom. This would tend to support our bearish Dollar view (see Crunch time for currencies ahead of pivotal Q4, 24 September 2018).
- Monthly seasonality in the Euro NEER, Romanian Leu and low-yielding Non-Japan Asian currencies has tended to be modest in the past eight years.
- High-yielding emerging market currencies, as well as the Malaysian Ringgit and Philippines Peso, have historically weakened the most in August-September
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