How the Stock Market Affects the Forex Market

Nikkei and USD/JPY

Before the global economic recession that started in 2007, when most economies suffered consecutive quarters of negative GDP growth, the Nikkei and the USD/JPY were inversely correlated.

Investors believed that the performance of the Japanese stock market reflected the status of the country, so a rally in the Nikkei led to a strengthening of the yen.

The opposite also held true. Whenever the Nikkei would drop, USD/JPY would rise as well.

Nikkei's changing correlation with USD/JPY

When the financial crisis hit, however, the relationships just went crazy like Lindsay Lohan.

The Nikkei and USD/JPY, which used to move oppositely, now move in the same direction.

Amazing isn’t it?

Who would’ve thought that stocks would have something to do with the foreign exchange market?

Well, we did, and now you know too!

Correlation Between USD/JPY and Dow

Let’s take a look at the correlation between the USD/JPY and the Dow. Based on what you read earlier, you might assume that the USD/JPY and Dow would be highly correlated.

However, a look at the chart below would tell you that it isn’t quite the case. While the correlation is positive, it isn’t as strong.

Dow's positive correlation with USD/JPY

Take a look at the Dow (blue line).

It peaked at 14,000 late in 2007 before dropping like a hot potato in 2008. At the same time, USD/JPY (orange line) also fell, but not as sharply as the Dow.

This serves as a reminder that we should always take into account fundamentals, technicals, and market sentiment, so always read up!

Don’t take correlations for granted because they aren’t a sure fire thing!

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  1. Forex and Global Equity Markets
  2. The Relationship Between Stocks and Forex
  3. How the Stock Market Affects the Forex Market
  4. How to Use EUR/JPY as a Leading Indicator for Stocks
  5. Intermarket Analysis Cheat Sheet