The summer months of June-August are usually a bit more quiet in the markets, with August being especially quiet. The lower liquidity means different trading characteristics.
However, this summer, like last year, will likely see more market storms and liquidity will probably remain relatively high. So if you are relying on lower liquidity for specific trading techniques, think again.
There’s an old adage saying “sell in May and go away”. The first part of this saying proved correct: May saw a huge sell-off in stocks, commodities and risk currencies such as the Aussie the euro. The second part seems irrelevant in 2012.
Worries have grown in Europe after the Greek elections and the Spanish banking crisis, but economic weakness isn’t exclusive to the old continent. While we did see a downfall in markets, the level of uncertainty didn’t see a downfall, but only rose.
More events are still set to unfold. Solutions for Greece, Spain and Italy are still needed. So is an answer about QE3, which has not been rejected nor implemented. Market action is expected to reach a peak when answers are given and to unwind afterwards. Past experience tells us that this isn’t likely to happen anytime soon.
As long as tension remains high, liquidity remains high and the special characteristics of low liquidity will have to wait until the next low season: December.
If we do get some answers and liquidity does fall, this is what we can expect:
- Long periods of slow range trading: when there aren’t too many market participants, trading slows down and currency pairs stick to ranges. For some traders, this could be an advantage.
- False breaks: the low number of market participants means that strong moves could be caused by a single institution. Such moves can temporarily break technical barriers, without any follow up.
Are you trading as usual this summer? Or taking a break?
Further reading: 5 Most Predictable Currency Pairs
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