FX Insights:The “sell in May”phenomenon

Since 2010 USD strength in May has become a pattern. The evidence is compelling: USD has strengthened and risk sentiment on a broad basis deteriorated in May for the last five years in a row. However, there have been key macro fundamental reasons that coincidentally occurred in May why this is the case rather than just seasonality alone.

    The infamous “Flash Crash” and Greek crisis kick-started the “seasonality” in 2010, and were followed in subsequent years by key data releases, central bank policy action and important market news that explained the USD strength via negative risk sentiment.

    US TIC data confirm the strength of inflows to the US in May with the run rate of inflows higher than that of a typical month in the year over the last five years. After negative risk events, safe-haven type inflows into the US likely accelerated, where the events were euro-area specific. As a result of that, USD outperformance against JPY, another safe-haven currency, is actually not that strong. However, the reduction of inflows in 2010 shows that the relationship between flow and USD seasonality may not be very strong.

    Much has been written about how stocks tend to underperform between May and October compared with November to April (see Got many "sell in May" e-mails?). The seasonality literature has even expanded into how stocks tend to outperform on a Tuesday relative to the rest of the week.

    We believe the “sell In May” seasonality is a product of clear macro-economic catalysts. Events such as central bank communications or weak data releases in May of those years were the drivers, rather than just a pure seasonal twist (see section below for more detail).

    As explained in Nicht schon wieder! / Not again! (6 May 2016), just because something happened on a given date in the past, it doesn’t mean it will recur on the same date again. Yet that’s what seems to have happened for six years in a row now, with various catalysts for USD strength in May. We argue that this year could see the same USD strength again, not for seasonality’s sake but for more fundamental reasons (see 3 reasons to be bearish euro, 4 May 2016).