All of the monetary markets are entwined. There are a variety of examples but one of the best examples is present in the relationship that the equities market has with the foreign exchange market. The perception of how the stock market is performing is part of the standard used by fundamental analysis while trading currencies and equities. A large portion of this perception is the result of whether or not the economy is performing well. The economy can have a large impact on equities trading. For example, if a stock for a company is traded as an equity, the presentation of that stock could be based upon the perception of how well that country’s currency is doing.
How is the Foreign Exchange Market affected by equities?
Here are some examples to show how much equities can affect the foreign exchange market:
Countries with export heavy economies generally favor policies of currency deflation. If a local currency is fragile then the export goods are cheaper and, for that very reason, other countries are inclined to purchase goods from that country because of the decreased value of the currency. Because of the increased purchase of export goods results in a profit from the producing companies. As long as these companies profit from export goods, then the currency will remain weak in order to continue this tradition of profit. One example of this situation took place in Japan until recently when the price of the Yen begins to increase and the value of the Japanese stock market decreased drastically.
The foreign exchange market can also be affected by equities due to acquisitions or mergers. Transactions such as these can be compensated through cash, stocks, or a combination of cash and stocks. If it is an extremely large transaction, one that might be larger than one billion dollars, and if the companies involved are in different countries, then there must be an exchange of currencies. Cash transactions have the largest impact on the foreign exchange market. Stock transactions have the smallest impact on the foreign exchange market. A 2000 study shows that cash transactions resulted in the receiving corporation’s country currency rising by a full percent. There are examples available in the table below.
These examples that have been mentioned above show, with irrefutable evidence, that the foreign exchange market and the equity markets are closely related. This information should be used when making trade decisions with the affected currencies.