Correlation Between Stocks and Forex can be positive or negative.
Most times when the stock market rallies high, so does the currency market.
This is because when more investors get to the stock market, demand for the country’s currency to purchase the stocks increases.
correlation between Stocks and Forex
positive correlation
The stock market involves buying and selling of companies’ stocks.
If you look into it, comparing companies performances and the Forex market, the companies are directly involved into the country’s economy.
On the other hand, their performances are then reflected on the Forex market.
In fact, the country’s economy directly affects stock value and then the Forex market.
For instance, most times the US dollar rises following the Dow Jones, S&P500 and NASDAQ strong gains and also Nikkie and the Yen.
Take a look at the chart below.
U.S. Dollar and Dow Jones chart
Explanation for Positive Correlation
If the stock market in the US is doing good, investors will rush selling off their domestic currency to buy the USD.
As demand for dollar increases, it appreciates in value.
In the Forex market, USD pairs will rise up favoring the dollar and of course most traders will buy the dollar.
Conversely,
if the US stock market is not doing good, the investors will sell off the USD(shares), and opt for more yielding stocks in other economies.
This shows that the U.S. economy is doing bad.
Also less demand for the dollar, de-valuates the USD value.
With the panic not to make losses, the Forex traders respond selling off their positions in the market.
Positive Correlation Nikkei and USDJPY
Nikkei and USD/JPY have shown a strong correlation for a long time.
Though Sometimes they move in different directions, it only happens for a short period of time then they get together again.
So any news that can affect Nikkei will possibly affect USD/JPY too.
Keeping an eye on it will help you to get an opportunity to go long or short..
Nikkie 225 Index and USD/JPY
The above charts illustrate the positive correlation between the NIkkie 225 Index and the USD/JPY
Like we said before, for foreign investors to invest in the stock market in any country( Japan), they have to change their domestic currency into Yen.
This increases demand for the Yen hence increase in value for the Yen.
The stock market influences the currency market but it is not a guarantee that this happens all the time.
The correlation between stocks and forex is sometimes unpredictable.
It may sometimes be negative but this happens at a smaller extent.
negative correlation
Like we said earlier, it is also possible for the currency market to appreciate when the stock market is fluctuating. The Reverse is true!
Take a look at the Chart below
Dow Jones with US. Dollar Chart
Investors may choose to liquidate their stocks and invest in the currency markets or do the opposite
So it’s not a guarantee that the poor performance of the stock market will lead to the collapse of the general countries performance.
There are still more factors to be considered under this issue.
The stock indexes and the currency pairs may move in the opposite directions (negative correlation) and it is OK.
As a Forex trader,
To use the stock market performances to analyse the currency pair is good.
However, you should not only rely on it without looking at other factors like the fundamentals and technicals.
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