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Forex: Santa Claus Rally Picking Up Steam

Christopher Vecchio

December is a typically bullish month for risk-seeking investors, with the S&P 500 producing average returns of +1.72% during the last month of the year. Will this prior behavior provoke investors to dump the US Dollar and into other assets? It seems so, with the Euro and Japanese Yen leading on Monday.


The beginning of the month offers new seasonal trends and a final period of trading for those investors left behind during the mid-summer rally. Indeed, if there was a time for those behind in their returns to scoop up some profit before closing the books for the year, it’s now: since 1950, the S&P 500 has gained, on average, +0.082% per trading session in December, good for an average monthly return of +1.72%. This amounts to nothing short of the (in)famous Santa Claus rally that will dominate mainstream media financial news coverage for the coming few weeks.

Boosted by some improving global PMI figures, particularly in Asia (Europe still looks weak, especially on the periphery), December has started out with a bang for global market participants, with the US Dollar underperforming on the whole, while riskier currencies like the Euro, and even the heavily manipulated currencies (then again, which aren’t these days?) the Japanese Yen and the Swiss Franc, are posting gains against the US Dollar.

There are two valid interpretations of today’s FX price action, which has seemingly diverged from typical correlations with other asset classes. While European equity markets and US stock futures are higher, the commodity currencies, the Australian, Canadian, and New Zealand Dollars, are struggling, failing to confirm the move, suggesting that today’s price action may not be so valid; or that the outperformance by the safe havens outside of the US Dollar suggests that the tensions over the fiscal cliff/slope may be worth respecting, and a bumpier road may be ahead. We’ll be exploring the role of the other safe havens throughout this month.

Taking a look at European credit, peripheral bond yields are lower, allowing the Euro to run higher. The Italian 2-year note yield has decreased to 1.866% (-6.4-bps) while the Spanish 2-year note yield has decreased to 2.767% (-2.5-bps). Likewise, the Italian 10-year note yield has decreased to 4.380% (-10.6-bps) while the Spanish 10-year note yield has decreased to 5.152% (-13.1-bps); lower yields imply higher prices.


EUR: +0.37%
JPY: +0.37%
CHF: +0.30%
GBP: +0.25%
CAD: +0.18%
NZD: +0.10%
AUD: -0.02%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.17% (0.00% past 5-days)