Traders, who trade on the foreign exchange market – Forex- always follow the trends and economic forecasts in order to be able to predict possible changes in exchange rates.
Some market participants are guided by reports on GDP growth, or by trade relations among countries. However, it is possible to predict the results of such reports, basing on the state of the stock market. After all, it is there goes information from thousands of companies worldwide that provide daily hundreds of reports. This can be a useful source of information for the currency trader.
Ultimately, the currency fluctuation occurs basing on the amount of supply and demand. If more traders want to buy a currency, it is likely that it will grow in relation to other currencies and vice versa.
However, this fundamental principle is influenced by various factors that cause permanent currency fluctuations every day. However, a complete list of these factors is beyond the scope of this article. Emphasis is placed on how the stock market can help a trader to get an idea about the changes in the currency market.
Forex trading market is truly a global market that exceeds the size of any securities market. Therefore, speaking on shares and their impact on the Forex, you should really think globally. For consideration, it is best to take those companies that conduct international transactions and counting them in different currencies.
For example, the company Wal-Mart, the largest retailer in the world, has to deal with currency exchange so often that it is hard to imagine. Another big name is Coca-Cola. Value of the shares of such international companies is associated with consumers around the world and gives a better overall assessment of the foreign exchange market.
The situation on the commodity exchange may also be useful in terms of the currency market. Let’s consider the basic commodity – the oil. World oil prices are denominated in U.S. dollars. For example, if the U.S. dollar falls against major world currencies, the price of oil could rise. The price of oil should rise to equal purchase prices in the currencies of other countries. Similar relationship can be traced back to the example of other commodities - sugar, wheat and corn. However, the relationship of oil to the currency market is expressed most strongly.
If the exchange rate is low, exports cheaper. As a result, exporters develop and get more revenue, which positively affects the state of the stock market. Of course, such a situation is typical mainly for those securities markets that rely on major world currencies (U.S. dollar, Japanese yen, Euro, British pound and so on).
Since the Forex market is very dynamic and changeable, the state of most companies is a lagging indicator to predict the directions on the Forex. You can assess the movement of currencies only when the income statement of the company is published.
Often, the data provided by the company itself is different from analysts' estimates. In this case, investors can analyze the comments of company’s leader board. Attention should be paid to any signs that the company intends to use hedging strategies.
In recent years there has been one major trend. Many international companies are trying to develop outside the United States. For example, in the late 2000s a coffee giant Starbucks has developed a plan to conquer foreign markets. Plan to create an international network included closing 800 cafes, which were mostly in the U.S. Sales and earnings of the company began to grow and shareholders have been rewarded with a higher stock price.
But Starbucks was not the only company that has taken into account the following rule: the best growth is in emerging markets. Almost all international companies making significant efforts to win market share in developing countries.
However, the idea of growth through the conquest of foreign markets is inseparable from the weakening of the dollar due to the use of other currencies. Ultimately, the key to a strong economy is generally strong currency, although in practice this is not always so. Investors should keep in mind that short-term fluctuations in the currency market are more the rule rather than the exception.
Of course, a strong national currency can’t absolutely guarantee the availability of a strong economy. For example, during the financial crisis in the U.S., the Japanese Yen continued to gain ground against the U.S. dollar. At the same time, Japan's economy for decades was not in the best condition. However, the strengthening of the yen occurred against the dollar, while the American economy was falling faster than the Japanese.
Forex is a complex dynamic market. Such aspects as stocks, taken in isolation, have disabilities in terms of prediction of currency fluctuations. The value of shares can be a useful tool for the analysis. However, investors should keep in mind that it’s not enough to use just only one tool of indicators.
