There is more than one way to measure the strength of a currency movement. One of these ways includes the equity market. If you are not aware of this yet, we are saying that the equity market is the same as the stock market.
Buying stocks from a foreign country
To explain everything clearly, let us start from the very beginning. For the sake of citing an example, we will only assume the values of the currencies that we will mention. For instance, you have decided to buy stocks from a foreign country. Let us say that you live in the US and you want to buy European stocks. Before everything else, you have to exchange your US Dollars first for Euros before buying European stocks. As a result, this increased the demand for the EUR, which appreciates its value as well. Simultaneously, selling your EUR also raises the supply, which leads to its lower value.
Pause and analyze what happened in the example that we gave. When the local investors’ and foreign investors’ insight about a stock market is good, they will most likely continue to invest their money. International cash will flow nicely. So, it makes sense that when the investors’ outlook about that particular stock market is not good, then they tend to doubt if they want to invest. Others who already did will most likely pull out and look for another stock market where their money will be in a better place.
Why are we talking about this again?
Do not get us wrong when we talk about the stock market. The stock market of major countries and economies also has a lot to say about forex. How? Let’s say that a country with a weak stock market hit its stride and started performing a lot better than before will only mean one thing. This stock market is weak no more as it is already on its way to becoming more robust. A more substantial stock market leads to a higher currency value for that country. Everything that we said is inversely true if a country that always has a considerable stock market suddenly got weaker. It will also mean that its currency will also have a lesser value compared to the others.
So, now what?
So, now we understand why forex traders should also pay attention to the stock market, albeit the fact that they trade currencies and not stocks. As a forex trader, you can pick up many clues in the stock market that can help you make a more sound trading idea or decision. Hence, we can say that a strong stock market is almost synonymous, if not synonymous, with a strong currency, while a weak stock market shouts weak currency. Simple, right? So, make sure that you always keep yourself posted on the major global equity indices. Buying currencies from strong stock markets and selling that to a weaker stock market can make you go home with a hefty profit. So, be smart and always keep yourself updated.