Does the stock market really have an effect on the forex market?

What are the things that come to our minds when we say stock market? It may be the stock market index, market performance, and whatnots. Does forex come to mind? Yes? No? Maybe? However, the stock market and forex have a close relationship.

Stock market index

To explain more about what we are trying to point out, let us start defining the stock market index and two specific examples that help us see how the stock and forex market are related. The stock market index is like a basket that contains carefully picked and curated stocks. These stocks tell us a lot about the current situation in the stock market. Hence, let’s talk about the Nikkei 225 and the Dow Jones International Average.

The Nikkei and the Dow Jones

Nikkei 225 is a stock market index in Japan. If you have come across terms like Nikkei, the Nikkei index, the Nikkei Stock average, know that it refers to the same stock market index. It gauges how well the biggest 225 companies on the list of TSE (Tokyo Stock exchange) in Japan perform.

On the other hand, we also have the Dow Jones Industrial average. Some people would also refer to it as the Dow or Dow Jones. It is also a stock market index and is situated in the US. It measures the performance of 30 of the largest companies listed on the New York Stock Exchange (NYSE) and NASDAQ in the US.

The relationship between the Nikkei and the USD/ JPY currency pair

We all know how the global recession in 2007 hurt most of the economies in the world. During that time, most economies several quarters of negative GDP growth. Also, during that time, the USD/ JPY currency pair and the Nikkei stock market index had an inverse correlation. Why is that so?

Investors think that if the Japanese stock market is performing well, then the country’s status is also well and good. So, if the Nikkei increases, then the Japanese Yen also increases. On the other hand, the same is true when investors think that the Japanese market is not looking too good. They believe that Japan’s status is also not in good shape if this is the case. Hence, Nikkei would decrease, making the USD/ JPY currency pair increase.

All of the things we mentioned were true until the financial crisis came where the Nikkei and the USD/ JPY used to have an inverse correlation now move in the same direction. The stock market is not solely about stocks, but it is also related to the forex market.

The relationship between the Dow Jones and the USD/ JPY currency pair

The US Dollar’s strength somehow reflects the US stock market and some substantial multinational corporations (MNCs). If the US dollar starts to increase, this can limit the profits of large MNCs when they offer goods and services to foreign countries. Why? A strong US Dollar makes it hard for MNCs to increase the price and maintain their sales’ current levels.

So, if we think about it, it might make sense to say that the Dow and the USD/ JPY currency pair positively correlate. However, it is still important to maximize the use of the three market analyses: fundamental, technical, and market sentiment.

Let’s wrap it up.

Let’s wrap up our lessons with two essential things. First, the stock market will tell us a lot about the forex market. Second and finally, do not forget to take advantage of the three market analyses.