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The correlations are inconsistent at best, and non-existent at worst.
If a weak US stock market means a weak dollar, and a strong US stock market
a strong dollar, why has the dollar gone no place versus the yen since Jan.
1999 when it was right around 108 too? I know Japanese stocks have performed
well, but that is not enough. That stock market is not large enough to drive
FX rates for any appreciable length of time.
The point is it is not the stock markets that drive the exchange rate, it is
the economies. FX trades over a trillion dollars per day. That is way way
beyond any equity market influence. Fixed Income markets have larger volume
in dollars (I think) than stocks do also (albeit, much more of that is
currency hedged than stocks are). If there is a relationship, it is between
interest rate spreads and currencies (I've found some correlations there,
but they are inconsistent too).
But, you do sometimes see currencies and stock markets move together. That
happens when, for example, a currency is forecasting a weaker economy (and
lower interest rates) as is a stock market. But the cause/effect has almost
nothing to do with FX and stocks. If anything, the correlation you might see
is residual evidence of something much larger. We are talking about the
relative strength/growth of economies. It is as simple as that.
For a good synopsis of the BIS piece, I think either out now, or soon to be
out, will be an article by Marc Chandler on thestreet.com. Marc is a former
colleague of mine, a friend, and one of the top FX analysts in the world.
Steve Poser
---
Steven W. Poser, President
Poser Global Market Strategies Inc.
http://www.poserglobal.com
swp@xxxxxxxxxxxxxxx
Tel: 201-995-0845
Fax: 201-995-0846
-----Original Message-----
From: listmanager@xxxxxxxxxxxxxxx [mailto:listmanager@xxxxxxxxxxxxxxx]On
Behalf Of James Taylor
Sent: Sunday, July 16, 2000 10:21 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: [RT] Re: MKT: Exchange Rates, Equity Market Correlations
The correlation is rock solid !
Weak ? Huh ?
----- Original Message -----
From: "Gitanshu Buch" <OnWingsOfEagles@xxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Sunday, July 16, 2000 6:55 AM
Subject: [RT] MKT: Exchange Rates, Equity Market Correlations
>
> For currency/equity traders:
>
> Those looking at the Dollar Index for stock market direction may find the
> study's other findings interesting.
>
> Just finished reading the Bank of International Settlements' Annual Report
> released in mid-June.
>
> Found, on Section V, "Foreign Exchange Market Developments" under "Stock
> Market & Exchange Rates", page 90-92. the summary of research covering 25
> years' correlation of price moves between, well, stock markets and foreign
> currencies for US, Japan and Germany... this conclusion:
>
> "Overall, these results suggest that the relationship between exchange
rate
> movements and stock market returns is weak. The movements of the major
> bilateral exchange rates do not appear to be influenced to any significant
> extent
> by the performance (be it absolute or relative) of the US, Japanese and
> German stock markets. Moreover, the time pattern of these correlations
does
> not support the conclusion that they were broadly driven by key
> macro-economic
> fundamentals, such as the cyclical performance, or by the relative
> monetary policy stance."
>
> Those interested may want to read it for themselves at
> http://www.bis.org/publ/ar2000e.htm
>
> Gitanshu
>
>
>
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