Is there are relationship between country's currency ex. rate and it's stock market?

Discussion in 'Economics' started by Akavall, Aug 24, 2007.

  1. Akavall


    Is there are relationship between country's currency ex. rate and it's stock market?

    Either way, does value of currency affect the stock market value, or does stock market value affect country's currency value.

  2. I hope someone replies. I'm sure I read an article sometime ago that it does.
  3. I would say that, in the USA, a weakening dollar prompts individual investors to place their money almost everywhere, from overvalued condos to overhyped stocks.
  4. tradethetrade

    tradethetrade Vendor

    It's rare to see a day where the Brazilian stockmarket closes up +2% and its currency loses value against the USD. Why? Because if such country is open to foreign investors, they will have to buy the country's currency to invest there hence influencing the country's exch rate. It's a pretty sad thing if you are an exporter watching your products get pricier and pricier on a daily basis while especulators like Bill Gross keep pouring money into Brazil's stock market leaving tons of people broke and unemployed.
  5. ptunic


    Yes, strongly.
  6. Akavall


    Thank you for the replies.

    So it looks like the process is something like this(?):

    If a country's currency is undervalued, investors (foreign) invest in that country's stocks, making it's stock market go up, and at the same since investors have have to buy "country's" currency the exchange rate would also go up (nearly simultaneously as the stock market?) I am assuming if the county's exchange rate is overvalued the same thing happens backwards.

    Also, it seems to be a chicken and egg type of situation, where it is not clear what causes what to change, i.e., stock market value and exchange rate cause each other to change.
  7. dhpar


    there are stock markets that trade like its ccy - in fact i often trade it as pairs. just look at japan as a prime example of that.
  8. It can also be opposite, a strong currency makes the stock market look strong to foreigners. This can attract investors. A weak currency can scare investors away.

    I don’t think there is an easy answer to this question.

    Using logic.

    A weak currency can be good for the stock market, more export more profit.

    A weak currency is inflationary -> higher rates, not good for the stock market.

    Does the stock market cause the currency to change or the currency the stock market to change?

    Economic growth can be a third variable explaining both a strong currency and a strong stock market.
    tom2 likes this.
  9. "Positive currency momentum predicts low stock index returns in the future" - The Journal of Business, Published by the University of Chicago Press
  10. Akavall


    Again, thanks for the replies.

    I am assuming weak currency is inflationary because, in order for it to be weak the central bank intervenes by buying foreign currency, i.e. supplying domestic currency, and this lead to inflation.
    #10     Aug 27, 2007