The fluctuation of any instrument on the stock markets ultimately depends on supply and demand. Increased investor demand for a particular instrument is likely to increase its value relative to the others. The decline in popularity and, accordingly, prices occurs in the case of oversupply of this instrument in the exchange markets.
However, the causes of constant market fluctuations lie not only in the fundamental principle of the ratio of supply and demand for a particular asset. Here it is necessary to take into account a number of numerous factors that can move the market. It is impossible to cover all such factors in this article, therefore we will dwell on the discussion of the mutual influence of the stock and currency markets. And answer the question about the possibility of understanding and evaluating the currency exchange through the stock market.
Interconnection of exchanges
1. Stock market and currency.
In some cases, to identify the relationship of the currency exchange and the stock market is very simple. For example, mainly countries with a predominance of export supplies over imports strengthen their currency, which leads to an increase in income. As a result of income growth, stock markets tend to show a positive trend. Such a rule is most often valid if the yield growth is supported by major world currencies, that is, the US dollar, the British pound and the euro. In turn, sharp changes in stock markets can set the tone for fluctuations on the currency exchange during the current world day, that is, for a short-term period.
Another thing is to understand the effect of stocks on the movement of currencies, you need to think globally. After all, any stock market will always be less than the currency market, which has a comprehensive distribution. The best example for understanding the globalization of the foreign exchange market could be the world’s largest companies operating in the entire global economic space.
Such companies in mutual settlements use currencies of various countries. For example, the largest supermarket Wal-Mart and the world famous Coca-Cola company solve external exchange issues like any other company in the world. The global capabilities of such corporations to make transactions with consumers around the world and are able to give an understanding of the global currency market.
2. Commodity exchange and currency market .
Not a secondary role in the understanding of market movement of currencies is played by the commodity exchange. Here it is worth considering the main world products, which primarily include crude oil.
An important point in the possible forecasting of the market movement is that the world oil price is set in the main reserve currency, that is, in US dollars. If we assume the situation with the decline in the value of the US currency in relation to its main currency opponents, then there is an increased demand for oil. At the same time, oil is purchased, of course, not for US dollars, but for other major world currencies. As a result, the price of oil is rising, and the balance of prices is balanced.
In some cases, such crops as wheat, corn, sugar can also act as world goods. However, the universal “barometer” among the goods is oil, which has the closest connection with the foreign exchange market. Of course, there are currencies that are directly dependent on the commodity market – the dollars of Australia, Canada, New Zealand and some other secondary assets.
Due to the current world economy, countries with commodity currencies become more dependent on the prices of goods and raw materials. If the buyer purchases goods, for example, in Australia, then he needs to convert his own currency into Australian dollars. In other words, if the price of goods sold will rise, then the Australian dollar will be relatively stronger, since the importer will need more of its currency to purchase more expensive goods. The opposite effect occurs in the case of falling prices for exported raw materials.
Evaluating the future of the markets
It is not possible to determine the direction of movement of the currency market with the help of most industry indicators. After all, the dynamics of currencies in the market is distinguished by its speed, which does not allow analyzing it by means of late reporting data of companies.
Moreover, the analysis of the work of companies may be distorted by indicators of the exchange rate values in the forex market itself. Late reports do not provide reliable information at the moment due to the changed indicators of currency quotes. Therefore, companies should include in their analytical work a forecast of possible changes in the foreign exchange market capable of securing the company in the future.
Some on the stock markets are trying to choose the type of asset, whether soft or hard, in trading and analytical forecasting based on market movements, which should not be done. It makes sense to use a technique that allows you to determine the usefulness of a particular asset for human life. For example, the world famous company Kraft sells food that is more useful for a person than jewelry products of the world brand Tiffany. Also the product of medicine, the fuel industry and so on is distinguished by this utility.
Unfortunately, the stock market does not provide advanced signals to determine the exchange rate, which are set depending on supply and demand. In turn, the demand and supply of any national currency depends not only on global financial institutions, but is rather easily regulated by the state through the main market regulator, interest rates. Therefore, the choice of shares as indicators of the value of the currency would be the wrong decision, because the state regulator is able to always cancel the laws of economic development.