Dollar Bears Beware as History of Mays Past Portends Resurgence

Updated on
  • U.S. currency has strengthened in May in nine of past 11 years
  • Probability of 2016 rate rise is 52%, from April low of 48%

Bears should beware of the dollar in May.

A gauge of the currency has climbed this month in nine of the past 11 years, averaging a gain of 1.3 percent. The dollar has already turned higher since the end of April, on course to halt a three-month losing streak, as the probability the Federal Reserve will raise interest rates this year climbed back above 50 percent. The greenback rose against all except one of its 16 major peers Wednesday even as an industry report showed U.S. companies hired fewer workers than economists forecast, two days before monthly payroll numbers.

“We’re probably at a bit of an inflection point for the dollar,” said Ray Attrill, co-head of currency strategy at National Australia Bank Ltd. in Sydney. “We’ve come down a long way with virtually any tightening in 2016 priced out, but we’re at a point when there’s almost too much bad news in the dollar. Having said that, we’re on guard for a softer employment number.”

The Bloomberg Dollar Spot Index was little changed on Thursday as of 6:53 a.m. in London, having gained 0.8 percent since the end of April. The gauge slumped 7.4 percent during the previous three months. The dollar was little changed at 106.96 yen and $1.1492 per euro.

Payroll Forecasts

Fed policy makers gather on June 14-15 after raising rates from near zero in December and then keeping them on hold for the next three meetings. U.S. employers added at least 200,000 workers for a third month in April, according to a Bloomberg survey before the Labor Department releases the data on May 6. Job growth at U.S. companies fell short of estimates, the ADP Research Institute said Wednesday.

The dollar has weakened this year as Fed officials said they were in no hurry to raise rates due to mixed U.S. data and heightened risks to global economic growth. As those concerns have eased, futures contracts show a 52 percent chance the Fed will raise rates this year, up from an April low of 48 percent. The probability of a move in June is 10 percent. The calculations assume the effective fed funds rate will average 0.625 percent after the next increase.

Hedge funds last week boosted bets the dollar will decline after turning bearish on the currency versus eight peers for the first time since 2014 in the previous week.

Seasonal Factor

One theory for the seasonality in the dollar’s bounce is that equities markets tend to decline in May and that’s sometimes accompanied by a run of weaker economic data, according to Ju Wang, a senior currency strategist at HSBC Holdings Plc in Hong Kong.

A gauge of global stocks show prices dropped in May in five of the six past years, according to a Bloomberg Seasonality Chart. A measure of Chinese manufacturing released this week missed economists’ estimates, reigniting concerns that growth in the world’s second-largest economy is slowing.

“Seasonality-wise, going into May, data would be softer, like for instance China PMI,” said Wang. “Bad data means weaker risk appetite and the dollar goes stronger. It would be bid as a safe-haven demand.”

Australia’s dollar climbed for the first time in three days after reports showing retail sales and the trade data beat analysts’ estimates.

The Aussie rose 0.6 percent to 75.04 U.S. cents after losing 2.7 percent in the last two days since the Reserve Bank of Australia surprised the market with a decision to cut interest rates.