The curious case of August Yen strength

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The Japanese Yen tends to appreciate against the US Dollar during the month of August. As imprecise as this market truism may sound, just look at the history of this currency pair and you’ll quickly see that a clear pattern emerges. August is a good month to be long the Yen.

Citi’s FX Technical’s group recently confirmed this idea by way of a study they conducted covering the period between 1987 and 2011. In a dataset composed of 25 observations of the month of August, they found that the USDJPY pair fell 16 out of 25 times. In fact, between 1998 and 2005, the pair fell every August in an unbroken chain. And, there is further statistical evidence of August’s significance when comparing this month to the rest of the year. Citi’s study examined the individual monthly data over 25 years. In the 300 months analysed, USDJPY fell in 149 months and rose in 151 – pretty much a 50/50 split. When compared to the 65/35 split experience in August, the relevance of this should be clear.

Interestingly, Citi found that Yen strength in August has been particularly pronounced when the difference between the interest rates of Japan and America was less than 2%. Currently the American benchmark rate is 0.25%, while the Japanese is 0.1%. Obviously this is a difference of just 0.15%, well below the 2% threshold. If history is anything to go by, then this suggests that this month could see further Dollar weakness versus the Yen.

Below are the results of Citi’s study-

The results are quite categorical. When the difference in interest rates was above 4%, which happened 11 times, the yen appreciated on just 5 occasions, or 45% of the time. However when the rate was between 2% and 4%, the yen appreciated 2 out of 3 times, or 66.7%. If you feel that 3 observations are too few to reach a firm conclusion, then take note of the instances when the difference in rates was less than 2%. On these occasions the Yen appreciated during August in 9 out of 11 years, or 81.8% of the time. From a trading perspective these odds cannot be ignored.

So far this August has been true to form. With the difference in rates well below the 2% threshold, so far the Yen has appreciated 0.29% against the Dollar.

Trying to explain this anomaly

In their study, Citi’s FX group attempted to explain why the Yen might be more likely to rise against the Dollar in August.

Starting first with Japanese exporters, Citi’s study pointed out that it is commonly accepted that these companies put downward pressure on their domestic currency. This happens when they exchange the Dollars they have earned through foreign sales into Yen. Therefore, one explanation for August’s statistical anomaly could be that this force is especially pronounced when financial market participants are largely away on holiday. Where this logic falls down however, is when you consider that August is generally a weaker month for Japan’s trade surplus. In fact, historically, August has traditionally been the second worst month of the year in terms of Japan’s trade surplus. In other words, reduced exports should temper Yen appreciation during this month, not increase it.

So, if Yen strength in August cannot be explained by Japanese exports of goods and services, what other factors could be behind this?

Citi’s study noted that the Japanese income account surplus for August averaged ¥737billion for August, which was the second highest month, after March. It was also 10% higher than the annual average. This could well be a driving force behind Yen strength, but I wonder if there is another reason, which Citi’s study missed (just!).

The Yen is regarded as being a safe haven currency. As City’s study noted, August is the month when many financial market participants take their holiday. Could it be, therefore, that those who are about to depart for a fortnight in the sun seek to park their money in the most secure places?

We suggested that the Yen could retrace back towards the 92.50 in this blog here – So far all is going according to plan.

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