How does Weather Affect My Trading Decisions

Since your emotions play a major role in trading, it is not surprising that the weather has a significant effect on your daily investment behavior. While sunshine brings a smile and positive attitude towards the future, and rain usually makes us somewhat depressed and sleepy, let’s look at ways the change in weather can dramatically influence your forex decisions. 

It might be odd to talk about weather on our forex blog, however you have to agree that knowing your weaknesses only make you stronger! And even if at first glance this topic sounds like a complete nonsense, we are here to discuss how individual investors’ mood affects your decision making.

The connection between sunlight and the rising markets is difficult to believe in, however there is a solid analytical research with very convincing facts provided by Mitra Akhtari of the University of California, Berkeley, in a paper titled “Reassessment of the Weather Effect: Stock Prices and Wall Street Weather. 

Cycling and the extremes

The weather is not the same all across the globe, and this can cause some differentiation between currencies that are based on countries having different weather effects. One of them is the offset between summer and winter; evidently the economy behaves differently between those two seasons, but they are also inverted for the southern hemisphere, meaning that Australia, New Zealand, and South Africa are affected adversely by seasonal trends, such as tourism, heating fuel needs, electricity demand, agricultural exports – all of which can move the currency.

Some countries are also more affected by more significant swings in the weather because they are closer to the poles. Canada and Norway are good examples of this, where there is a shortening of outdoor production time due to extreme cold, and increased demand for fuel. While both countries produce enough of their own fuel, and even excess to continue exporting, it does impact the spending patterns of their citizens. Contrast this with Turkey, for example, where there is a higher demand for energy during the summer for air conditioning.

However, since a lot of these are known factors, they are usually priced in ahead of time; the NZD will strengthen typically in October-November in the lead-up to the expected demand for the currency due to tourism and exports at the start of the next year. The effect is enough to see annual “humps” in a long-term graph, despite other factors influencing the Kiwi.

Sun makes us irrational!

Apparently we turn into wild animals on sunny days! Everything seems more cheerful and the world is full of possibilities. All that summer happiness is useful when you are on the beach with a cocktail in your hands, and much less promising when you tend to take more risks, open more positions and ignore your trading plans just because the sun is shining.

So whenever you are humming “Get Lucky”, followed by “Blurred Lines”, time to look outside that window and think hard whether your “happy-go-lucky” attitude is really because the market is smiling at you, or rather because it is so nice out. Grab a cocktail and go to the pool instead of making dreadful decisions! 

Stock prices climb up on summer days

Sun affects all of us and brings not only individual impact but also wide market effect. In the last 4 decades, stock prices tend to climb up on a sunny day and go back down when the skies filled up with clouds.

Another interesting fact related to weather mood swings and investment, the above mentioned effect is goes full swing during the financial instability. The last global financial crisis in 2008 is a great example of such. 

Newbies are at more risk from the sun exposure!

When experienced traders know better not to rely on luck and cheerful mood, beginners are completely another story. Most newbies see sunshine as a sign of true optimism and “let’s-try-my-luck-today”. 

Automated trading is immune to the sun

One thing is apparent – traders who rely on algorithms and trading robots tend to overcome the weather changes without major slap on their trading behavior and results. The automated programs do not have an urge to buy when the sky is clear and sell when the clouds block the sun. 

Political Events

An election – a common event in almost every nation – can have a large impact on a country’s currency. Elections can be viewed by traders as an isolated case of potential political instability and uncertainty, which typically equates to greater volatility in the value of a country’s currency. In most situations, forex participants will simply keep an eye on pre-election polls to get a sense of what to expect, especially looking for any type of change at the top. A change in government often means a change in ideology for the country’s citizens, which usually means a different approach to monetary or fiscal policy, both of which, especially the former, are big drivers of a currency’s value. Additionally, political parties or individuals who are seen as more fiscally responsible or more concerned with promoting economic growth tend to boost a currency’s relative value. So in the case where an incumbent who is seen as “pro economy” is in danger of losing his or her position of power, traders may sell out of the currency for fears of limited future economic growth and predictability.

Another circumstance of great importance is an unexpected election. Whether it comes via a non-confidence vote, corruption scandals or other situation, unplanned elections can wreak havoc on a currency. Especially in cases where upheaval among citizens results in protests, work stoppages, etc. Such events cause great uncertainty in countries and increased political instability. Even in cases where an autocratic government is being challenged in favor of a new, more democratic and economically open-minded government, forex traders don’t like the uncertainty caused by such protests. In most situations, the political instability will outweigh any positive anticipated outcomes from a new government in the short run and related currencies will usually suffer losses. In the long-term, however, basic valuation factors and principals will once again apply and currencies should settle at or around a rate indicative of the country’s economic growth prospects. Investing overseas begins with a determination of the risk of the country’s investment climate.

Effect of War on Currencies

Unlike a currency war, wherein countries actively attempt to devalue their currencies to aide their domestic economies in global export trading, a physical war can be far more devastating to a country’s economy. Much like a natural disaster, the impact of war is brutal and widespread. Similar to disasters, the damage of war to infrastructure deals a huge blow to a nation’s short-term economic viability, costing citizens and governments billions of dollars.

History has shown than war rebuilding efforts must often be financed with cheap capital resulting from lower interest rates, which inevitably decrease the value of domestic currency. There is also a huge level of uncertainty surrounding such conflicts on future economic expectations and the health of affected nations. Thus, nations that are actively at war experience a higher level of currency volatility compared to those not engaged in conflict.

That said, some economists believe that there is a potential economic upside to war. War can kick-start a fledgling economy, especially its manufacturing base when it is forced to concentrate its efforts on war time production. For instance, the U.S. entry into World War II following the attacks on Pearl Harbor helped pull the country out of the grips of the Great Depression. While there is some historical precedent for this viewpoint, most would agree that an improved economy at the cost of human lives is a very poor trade-off.

The unexpected

The weather is famously unpredictable and therefore can catch the markets unprepared. A series of hurricanes moving into the Gulf will shut production and drive up fuel prices in the US, leading to currency distortions. Unexpected snowfall in Canada or Russia can lead to a jump in agricultural commodity prices, supporting the currencies of agricultural suppliers, such as Australia and New Zealand, while impacting countries that import foodstuffs, like Japan, China, and the UK. Heavy rains in Australia, especially Queensland, can flood mines and railways, cutting commodity exports and depressing the AUD.

Weather conditions can move the stock market, which in turn can affect currencies; rising prices in food due to poor weather can impact inflation, and even go so far as to influence the outlook of central banks and their monetary policy decisions.

Short-Term Market Impacts of Major Weather Events

One reason for the skepticism about the potential effect of the weather on the stock market is that it ignores everything else that’s happening on any given day—and related emotions to that news. People who are trading stocks might make a different decision if they weren’t so happy, sure, but that might have nothing to do with the temperature outside, notes Tom Martin, senior portfolio manager at GLOBALT Investments in Atlanta.

“Ever since 1987 when I got into this business, I’ve read a lot of studies, and statistics are great in that a slight correlation could mean virtually anything,” he says. “But when people look at something like the daily weather, it can become a self-fulfilling prophecy.”

Even so, he says there are certain types of weather events—hurricanes, flooding, major blizzards, for example—that have “a definite impact in the short term” on stock prices. That’s because there could be knock-on effects, like the amount of heating oil that consumers use or altered retail sales if there’s a faster-than-normal transition from winter to summer clothes, he says.

Martin points to an arctic blast in 2017 that blanketed areas of the Northeast with snow, forcing market participants to predict what effect the weather would have on the earnings for some companies during that quarter. Still, the direct impact to stock prices from these types of weather events tends to last only a few days, at most, he adds.

“By and large, even if the weather had a temporary, negative effect on stock prices, it didn’t have a long-lasting impact on fundamentals,” Martin says.

What’s more, for the inevitable weather events, like hurricanes, professional traders typically buy those stocks that could stand to benefit (like Home Depot and Lowe’s) months ahead of when they expect them to happen, Martin says. As a result, when there’s news that a hurricane is approaching the U.S., the temporary bump in stock prices may obscure a longer rally, he says.

How to use Weather Changes for your own good in Trading?

What does this all mean to you? Do you need to buy puts now whenever it is a rainy day? Definitely not, however understanding how weather affects your positive or negative attitude during the day and impacts your investing decisions is important for controlling the emotions and strengthening your self-analysis. 

While the bigger players are not affected by weather changes, all of us, individual investors, should make it clear – learn to control the psychological aspect of investment to be alongside with the pros. Otherwise a seemingly sunny day can bring an unwelcomed storm into your live.

Conclusion

The effects of climate change on the forex market underscore the interconnectedness of global events. What was once an environmental concern is now a significant economic and financial consideration. As the world continues to address the challenges posed by climate change, the ripple effects on currency values will become more pronounced.

Forex traders, now more than ever, need to broaden their horizons, factoring in global environmental policies and events into their trading strategies. As the fight against climate change intensifies, its influence on forex is poised to grow.

As we consider the broader implications of climate change on the global economy, what other sectors do you foresee being impacted, and how might that further influence the forex market? Share your insights and predictions for the future.

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