The fact that market activity can fluctuate around the holidays is known by many in the professional market but is often not recognised by more casual observers. So why can markets behave in this fashion? The primary answer has to do with long-term and strategic traders in the professional market. These traders are the main drivers of sentiment and trend. From their perspective, periods where the markets are closed or trading activity is low – Christmas, New Year’s Day, Easter and Thanksgiving – are times when individual trading days can be distorted by a lack of volume and can move beyond the normalised limits of typical trading ranges. This poses the question about whether the move is for real and also extenuates risk. In order to minimise this problem, they close out positions. This behaviour often manifests itself in a trading day, just before the holiday, that has a larger range and directional move, and to the uninitiated, indicating a trend acceleration or reversal.
Post-holiday, many traders have had time to reassess both their fundamental and technical outlook, and they must make decisions about the next market direction. There is also a heightened likelihood that fresh news or perspective captured the market’s attention when it was closed.
This theory applies to all asset classes and, while it is obvious that not every holiday will cause this phenomenon, and not all asset classes will do so at the same time, it is a key requirement for treasurers and hedgers to have a raised level of focus. Indeed, history shows that some holidays have more significance than others. Figure 1 shows the holiday points from December 2009.
The period between Christmas and New Year’s Day is the time of lowest volume, and so moves are more likely to be extended or false. When the year begins, there is a reticence to instigate large positions quickly, which means that the first US holiday in January, Martin Luther King Day, can be a catalyst. Figure 1 shows this last year, where Martin Luther King Day was the starting point for continued strength in the US dollar rally that began in December, and made its high just before Christmas. This rally continued through Easter, which is not a federal holiday in the US, before reaching exhaustion just after Memorial Day in May.
Independence Day is also a key moment, and last year saw a fresh acceleration phase that ended in early August as major traders took summer breaks and closed out positions. This led us into the next pivotal moment at Thanksgiving Day.
Thanksgiving’s importance is due to the fact that many traders are reluctant to jeopardise their returns for the year, and so they withdraw. An additional factor is that November is year-end for many trading institutions in the US, and these institutions do not wish to participate in the thin markets prevalent in December.
Once again, Martin Luther King Day was the catalyst for a fresh accelerated down phase this year and, coming into Easter, the US dollar is at trend lows and was not helped by the warnings on debt. This move accelerated on Wednesday, and with next week seeing the advanced gross domestic product (GDP) numbers on Thursday and the eurodollar threatening to overcome the key 1.4556 point, the US dollar finds itself at a pivotal moment.
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