Forex Investment and Currency Trading

The analysis of the seasonality of the Japanese yen (JPY) is with respect to the assumption that Japanese firms tend to repatriate foreign profits ahead of fiscal year-end on 31 March. The JPY tends to strengthen versus major currencies and the Korean won (KRW) in January and February and weaken in April and May. This is in line with the fact that Japanese repatriation ahead of the fiscal year-end typically peaks at the end of February. The pattern of JPY appreciation in Q1 followed by depreciation in April and May is clearer for GBP-JPY, CAD-JPY, AUD-JPY, NZD-JPY, and JPY-KRW than for EUR-JPY and USD-JPY. In sum, positions aimed at capturing JPY seasonality appear less risky in the first months of the year. However, seasonal factors do not appear alone to result in strategies leading to stable returns. Back-tested over several years, seasonally based strategies provide only small positive returns on average. Fundamentally, market experts believe that sustained JPY strength is over for now. This is due to two key factors: 1) deteriorating Japanese fundamentals and 2) the fact that unwinding of JPY carry trade appears to have run its course. One caveat to this view is that Japan’s Diet may pass a law permanently exempting from taxation dividends received by domestic companies from their operations abroad. If the law is passed this could lead to some JPY strengths as Japanese firms will have greater incentives to repatriate profit from abroad.