Seasonality: does it work?

Currency traders pay a lot of attention to seasonality. “NZDUSD tends to sell-off in August” is often cited as an argument (combined with other considerations, of course) to either short the pair or at least not go long.

Yes, NZDUSD tends to sell-off in August, but does that mean you should do it?

Come September, we will probably move on to the seasonality tendencies for that month, and there is seldom a review of whether seasonality “worked” in August.

So here I’m doing just that. I am “trading” every seasonality recommendation to test whether there is any value in this metric at all. If a currency pair exhibits strong seasonality for a month – i.e. it strengthened or weakened in 4 out of 5 months in previous years – then I long/short that pair.

Its earlier stuff was better

The results are decent, but they’re neither unanimous (some currencies do better than others) nor consistent over time (lately, seasonality hasn’t been doing that well).

  • Seasonality has never been a particularly successful strategy for USDCHF or USDTWD
  • For currencies where it has been successful, that success petered out around 2017
Combined returns of a seasonality strategy for G10 excluding NOK and SEK

So the short answer is that this is a strategy whose best years are probably behind it. Since 2017, you wouldn’t have lost much on seasonality, but you would not have made much either.

Everything done on Python.

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