Let’s have a look at how the forex market affects the stock market, more specifically stock indices.
When people discuss the stock market, they frequently refer to the market’s performance using a stock market index.
A stock market index is essentially a carefully selected basket of stocks. This stock list provides a general picture of what’s going on in the stock market.
In this lesson, we will look at how currencies can affect two different stock indexes:
- The Nikkei 225 more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average is a Japan stock market index that measures the stock performance of Japan’s largest 225 companies listed on the Tokyo Stock Exchange (TSE).
- The Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a U.S. stock market index that measures the stock performance of 30 large American companies listed on the New York Stock Exchange (NYSE) and the NASDAQ.
Nikkei and USD/JPY
The Nikkei and the USD/JPY were adversely connected prior to the global economic recession that began in 2007, when most economies had successive quarters of negative GDP growth.
Because investors believed that the performance of the Japanese stock market reflected the country’s prestige, a rally in the Nikkei resulted in a strengthening of the yen.
The opposite was also true. Whenever the Nikkei fell, the USD/JPY rose with it.
When the financial crisis struck, however, the relationships exploded like Lindsay Lohan.
The Nikkei and the USD/JPY, which used to move in different directions, are now moving in the same direction.
Isn’t it incredible?
Who would have guessed that equities have anything to do with the foreign exchange market?
Correlation Between USD/JPY and Dow
Let’s look at the relationship between the USD/JPY and the Dow.
In general, the strength or weakness of the dollar affects the stock market in the United States, particularly equities of large multinational firms. (MNCs).
A rising US currency might reduce profitability for huge US multinational corporations that offer goods and services internationally.
When the dollar is strong, it affects such companies because it makes it difficult for them to raise prices or even maintain existing sales levels.
However, you might expect the USD/JPY and Dow to be closely connected.
However, a glance at the table below reveals that this is not the case. The association is positive, but not as strong.
Take a peek at the Dow Jones. (blue line).
It peaked at 14,000 in late 2007, before plummeting precipitously in 2008.
At the same moment, the USD/JPY (orange line) plummeted, though not as dramatically as the Dow.
This serves as a reminder to always consider fundamentals, technicals, and market sentiment, so always read up!
Correlations should not be taken for granted because they are not a definite thing!
