Previously we have talked about intermarket analysis and how 4 major financial markets can influence each other. Now, just to repeat what we have already talked about and to talk more specifically about forex and what and how other markets influence it, I’m writing this post.
Foreign exchange and Equity markets
Equity markets do have significant impact on the foreign exchange price movements. On equity markets there are huge movements of money, of currencies – for example when investors change markets in hopes to make more money, eg. From US market to UK market, etc. There they have to buy the local currency of the market, thus causing the demand of the currency to increase and increasing demand, as we know, tends to increase the value of the item demanded. So when, lets say US equity market, is in good shape and rises then it’s a good sign to foreign investors who will now have more confidence in US market and they will bring their money to US equity market and the demand for USD gets stronger.
So if US equity market rallies, the USD becomes stronger and the value of the currency rises while other currencies against USD weaken. And if US equiry market declines...so does the USD and this also means other currencies get stronger. The same applies not only for US but for other countries too. If London equity market rises, so does GBP and it gets stronger against USD thus making USD weaker against GBP. Same for EUR zone. For example if German equity market (DAX) rises it’s bullish also for EUR.
Eurodollars and Euribor and Gilts
Firstly you might not know what they are, so – Eurodollars are USD denominated assets that are held outside US. Euribors are fixed income products that reflect Europe’s short term interest rates. What’s the link between them? If Euribors are offering premiums to Eurodollars, investors are more likely to be interested in buying foreign assets and sell their US assets and this again influences US dollar by making it weaker. The opposite also applies – if the positive differential between Euribor and Eurodollars decreases US dollar gets stronger. When we bring also UK to the picture, we also need to check Gilts which is pretty much comperable with the other two. And again, the same applies for all other countries and currencies.
There are more in this topic – about some of it you can read from my previous posts in Intermarket Analysis section and about some of it you can expect to read in the near future.
