FX Market Anomalies – History Repeats Itself

When you analyze the FX market, you may notice that “abnormal phenomena” that theoretically shouldn’t happen occur again and again. These phenomena are called “anomalies.” According to the efficient market hypothesis, such predictable patterns shouldn’t exist, yet various anomalies are observed in real markets. In this article, I’ll explain the main market anomalies seen in FX and how to use them.

The Strange Relationship Between Market Efficiency and Anomalies

The efficient market hypothesis holds that market prices reflect all available information, making it impossible to predict future prices. In real markets, however, statistically significant “anomalies (abnormal phenomena)” are observed repeatedly.

Possible reasons why anomalies exist include the following factors.

• Irrational behavior patterns of market participants
• Regular trading activity by institutional investors and corporations
• Seasonal changes in capital flows
• Structural characteristics of the market

Many anomalies arise from the collective behavior patterns of market participants. For example, because many funds rebalance at the end of the month or quarter, specific price movements tend to be observed around those times.

Do Monthly Anomalies Exist?

In the stock market there’s a saying: “Sell in May and go away” (and buy back in November). But what about the FX market?

For example, some studies suggest the yen tends to strengthen in August, but the probability is only in the 50% range, so it may not be a clear bias.

That said, there do seem to be anomalies such as December being prone to sharp swings due to year-end position adjustments, and January’s price movement often defining the range for the rest of the year.

Price Behavior by Day of the Week

In the FX market, characteristic price movements can sometimes be seen depending on the day of the week.

• Monday: Gaps can form in response to weekend news, and moves to fill those gaps are sometimes seen afterward
• Wednesday: Many US economic indicators are released, so volatility tends to rise
• Friday afternoon: Position adjustments ahead of the weekend are common, and European and US traders tend to close their positions

Day-of-week effects tend to be especially visible in major currency pairs such as USD/JPY and EUR/USD. However, when important economic indicators or events are scheduled, these usual patterns often break down.

Price Behavior by Time of Day

The FX market runs 24 hours a day, but price behavior differs greatly depending on the time of day. These time-of-day anomalies are explained in detail in this site’s article “Price Movement Characteristics by Trading Session.”

Calendar Anomalies

The FX market also has anomalies tied to specific dates.

The Gotobi Day Effect

In Japan, the 5th, 10th, 15th, 20th, 25th and the last day of the month (30th/31st) are called “gotobi days” (Japan-specific settlement days falling on multiples of five). Because they coincide with corporate trade settlements and paydays, the yen sometimes shows characteristic movements on these days. Some studies report that USD/JPY tends to rise toward 10 am JST (01:00 UTC) on gotobi days. This is because importers sell yen to make dollar-denominated payments to their suppliers. However, heading into the Tokyo fix, exporters move to buy yen, so the yen also tends to strengthen. Month-end gotobi days in particular tend to see concentrated dollar selling and yen buying by exporters.

The Month-End Effect

At month-end, many institutional investors rebalance their portfolios, so characteristic price movements can be observed. In USD/JPY in particular, a tendency toward dollar strength can sometimes be seen heading into the London fix at month-end. This is due to the rebalancing of various international indices and investment benchmarks.

This month-end dollar strength is thought to be driven by overseas investors buying back US dollars for month-end index calculations, as well as corporate month-end accounting needs.

Fiscal Year-End (End of March) Trends

At the end of March, the end of Japan’s fiscal year, characteristic price movements driven by Japanese companies’ year-end accounting can sometimes be seen. The following patterns in particular are observed.

• A tendency for yen-buying pressure to build from mid to late March (repatriation of companies’ overseas profits)
• Rising volatility toward the last business day of the fiscal year
• Cases where the yen weakens on the first day of the new fiscal year (around April 1)

Anomalies Around Political and Economic Events

Changes of BoJ Governor

The BoJ governor normally changes every five years, and the yen can be heavily affected by the new governor’s monetary policy stance. For example, rising expectations of a dovish (preferring easier policy) governor tend to increase pressure toward a weaker yen, while rising expectations of a hawkish (preferring tighter policy) governor tend to increase pressure toward a stronger yen.

It seems that speculation often starts being priced in one to two months before the announcement of a new governor, and the market often moves sharply again on remarks made at the first monetary policy meeting after the governor takes office.

US Presidential Elections and USD/JPY

US presidential elections are held every four years, and characteristic patterns in USD/JPY can sometimes be seen in election years and the years that follow.

• Election years bring greater uncertainty, so volatility tends to rise
• There’s a temporary reaction right after the result becomes clear, followed by moves reflecting expectations for the new administration’s policies
• A common view is that Democratic administrations favor a weaker dollar and Republican administrations a stronger dollar, but the actual policies have a bigger impact

The Impact of Domestic Elections

Japanese political elections, especially LDP leadership elections and general elections, can be considered one of the anomalies with a notable impact on the yen. Political uncertainty and the possibility of policy changes can be reflected in the yen’s movements. There have actually been cases where the intraday chart moved sharply as the vote count in an LDP leadership election progressed.

These political and economic events increase short-term volatility, so you need to be more careful with risk management before and after them.

A Practical Approach to Using Anomalies

This site places the greatest importance on technical analysis when making trading decisions. Dow Theory, multi-timeframe analysis and horizontal level analysis form the core. I recommend using market anomalies as supplementary input for your decisions.

If you backtest on historical charts, you’ll see that in most cases you can make a profit with technical analysis without worrying about anomalies. That said, it’s true that keeping things like gotobi days and political events in mind can benefit your trading decisions.

Summary: A Trading Strategy That Puts Anomalies on Your Side

FX market anomalies are statistical patterns arising from market inefficiencies. By understanding them and using them appropriately, you can improve your trading edge.

However, anomalies are only “tendencies” and don’t work 100% of the time. I recommend using them as supplementary input on top of the basic technical analysis this site recommends (Dow Theory, horizontal levels and multi-timeframe analysis).

As the saying “history repeats itself” suggests, patterns do exist in market movements. At the same time, you’ll often hear “this time is different” in the markets. Try not to get too caught up in anomalies, and use them with a sensible balance.