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The Effect Of Equities On FX Rates

FX Rates and Equities

It is a common task for traders to try and find the most suitable method to predict the price movements in FX rates.  Some of them look to a country’s trade relations or its gross domestic product, but you may be able to predict certain trends by keeping an eye on the equity markets.  The companies involved in equities markets issue hundreds of reports every day and it may be possible for forex traders to use these reports to predict FX rates.

Fundamentals

The supply and demand of a certain currency will influence its FX rate and the fluctuations experienced by the currency.  A high demand by investors for a currency will increase its value and a decline in this demand will cause a decline in the currency rate.  Several other factors influence this constant currency price movement.

The forex market is a large international market which is much bigger than the securities markets.  When you take into account the effect the equities market may have on the foreign exchange market, you have to take into account the worldwide impact.  The companies you have to keep your eye on in the equities market are the ones that have international links.  These companies deal with global consumers and their stocks are purchased worldwide.  Keeping your eye on these companies will provide you with a corporate view of the forex market.

As far as the commodities market is concerned, forex traders could focus on crude oil.  The oil prices are normally quoted in US dollars.  If the US dollar experiences a decline when compared to the other major currencies, the oil price may experience an increase.  The oil price increase is used to stabilise the prices other countries have to pay in their domestic currency.  Other commodities to watch are wheat, sugar and corn which offer similar outlooks, but crude oil is the commodity that has the most impact on the foreign currency market.

The foreign exchange market is often affected by movement on the equity market.  A weak currency makes exports of a country cheaper to others.  This creates a profit increase and the export companies experience a growth.  The equity markets are pushed up by this earnings increase and company growth.  This normally occurs with equities that are supported by major currencies.

The Future of FX Rates

The constant fluctuation of FX rates in the foreign exchange market creates an industry lag.  The currency markets experience an impact once company reports have been published with details of earnings.  It is necessary to make a distinction between hard and soft assets to allow you to identify potential movements in the FX rates.  The main consideration to make is the necessity level of the asset.  Items such as gasoline, medicines and food are higher on the necessity list than clothes and jewellery.  This makes the financial movements of a company that supplies medicines worldwide more useful to the forex trader than a company that sells jewellery.

It is not advisable to only make use of the equities market to predict the FX rates.  Interest rates, government monetary policy and balance of payments play a massive role in your predictions and should be taken into account.

 

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