Forex Trading Library

Does The January Barometer Carry Over to Forex?

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There is a saying among equity traders: “As goes January, so does the year.” Meaning that if stock markets rise in January, typically the rest of the year will be positive. And vice versa. This is known as the “January Barometer”. So, given the interplay between stock markets and currencies, does FX follow a similar pattern? And what does that mean for 2024?

The issue has to do with risk appetite; stocks rise when markets are willing to take on more risk. That means yields on Treasuries are lower, which depresses the dollar. The increased risk appetite also typically benefits commodity currencies as traders are looking for yield as opposed to avoiding risk. So, there isn’t a direct 1-to-1 correlation, but the patterns do overlap.

There is a Wrinkle in the Projections

Historically, the stock market is up 80% of the times when January generates positive returns. But, this doesn’t imply the dollar is weaker as often as that, because the value of the greenback is determined by a basket of currencies. The biggest currency in that basket is the Euro. So, if both the US and Europe have a “January effect”, then the impact on the currency can be significantly reduced if not completely canceled out.

This year, though, the US saw its stock markets rally to new record highs, while in Europe the situation was a lot more muted. The shared economy is barely escaping a recession, while the US most recently saw 3.3% annualized growth. Europe is seeing its unemployment rise, while the US has job creation numbers that exceed all expectations (for January, at least).

Defying Traditional Logic

Therefore, even if the dollar is expected to be weaker this year as the Fed cuts rates, the Euro might get weaker even faster. It doesn’t even need for the ECB to cut faster; if the Eurozone economy is faltering, it won’t attract as much investment, which means fewer Euros are being bought. The second largest component of the dollar basket is the Pound, with the UK likely to follow a similar route as the Continent, because it’s subject to similar factors.

Thus, the dollar index might not show much weakness, but that doesn’t mean the dollar isn’t weakening. Which becomes relevant to other currencies, and particularly things that are bought in dollars: Gold, silver and crude. The dollar index might rise, leading investors to think that gold will fall. But that pattern doesn’t necessarily carry through if the Euro is getting weaker faster than the dollar.

It’s a Global Economy After All

The January Barometer is suggesting that the US will avoid a recession this year, despite other indicators to the contrary. Corporate earnings fell for the fourth consecutive quarter, and the New York Fed Recession indicator still shows a 63% chance of a recession this year. But, investors appear to be ignoring that, focusing on hopes of a rebound in earnings.

If the US does manage to pull off a soft landing in a world where China is seeing dwindling growth. Europe is teetering on recession and two wars remain active, the dollar’s refuge status might be the driving force. Which means that the greenback could follow stock prices higher, and reverse traditional patterns.

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