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How Equities Affect The Foreign Exchange Market

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How Equities Affect The Foreign Exchange Market

Traders in the foreign exchange market are always on the lookout for economic data and trends to try and predict movements in particular currencies.  Some look to an economy’s gross domestic product or trade relations, but it may be possible to predict these trends by making use of the equity markets.  The firms involved in the equity markets produce hundreds of reports on a daily basis and forex traders may be able to use these to their benefit.

Fundamental Principles

The fluctuations experienced in currencies are based on the supply and demand of a particular currency.  When a currency is demanded by investors, it will become stronger and the reverse is true if there is an over-supply of a currency.  There are several other factors that influence the rise and fall of currencies.

The foreign exchange market is a large global market.  It is larger than any of the securities markets.  So when you consider the effect of the equities market on the forex market, you have to consider the global impact.  The companies to consider in this market are those that operate internationally.  These companies and their stocks deal with consumers from around the world and they offer you the best corporate view into the currency market.

Forex market traders can gain insight by using the commodities market.  The main commodity to focus on in this market is crude oil.  International oil prices are valued in US dollars.  The oil price may increase if the US dollar experiences a decline in relation to other major currencies.  This requires that the oil price increases to stabilise the price that other countries purchase at in their domestic currency.  There are other commodities, such as wheat, corn and sugar that offer similar views, but oil is the one commodity that could affect the forex market.

The forex market can be affected by the equity market.  A country with a weak currency causes their exports to become cheaper in other countries.  This causes a growth in profits and size of the particular exporters.  As soon as there is an increase in earnings, the equity markets are fuelled.  This is most likely to happen with equities that are backed by the major currencies.

The Future Of The Foreign Exchange Market

Due to the fluctuation if the forex market, other industries are generally lagging behind.  It is only once company reports have been issued detailing the earnings achieved that the effect will be evident on the currency markets.  You need to differentiate between soft or hard assets to identify the potential movements on the currency rate.  The necessity of the asset is the fundamental point.  Items such as food, medicines and gasoline are more useful commodities than jewellery and clothes.  So the earnings and financial movements of a company that sells food internationally will be more useful than those of a company trading in the clothing market.

Equities alone are not a very good method to use to predict the direction of the forex market.  Government monetary policy, interest rates and balance sheet play a huge role in these predictions and should always be borne in mind.



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