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The FX Bootcamp Guide to Strategic and Tactical Forex Trading by Wayne McDonell

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COMMODITY CORRELATION: EQUITIES

Okay, stocks are not a commodity, but they can correlate well with the currency markets and must not be overlooked.
At FX Bootcamp, we don’t focus on specific stocks, just the major stock indexes around the world. Japan’s Nikkei, Germany’s DAX, the United Kingdom’s FTSE and the United States’ S&P 500 are very important to forex and we watch them along with our currencies. Why not? Money flows into and out of the markets, and this global money flow impacts the value of money.
A stock index is simply a broad basket of stocks listed on the exchange. As the general market rises, it is obviously attracting buyers of stocks listed on the exchange and tracked with the index. As foreign money pours into the market, it is converted into the local currency. As the market falls, investors are cashing out and want their local currency back. This is how the stock markets directly impact currency values.
Does that mean if the Nikkei is rising you should buy JPY or if the DAX falls you should short EUR? Perhaps, but wouldn’t it be easier to have a one-trade-fits-all option? You may have one. It is an indirect relationship, but FX Bootcamp statistics show it is still an effective alternative.
Trading the EUR/JPY is a measure of risk tolerance by traders around the globe. It moves very closely with the major stock indexes, not because currency is flowing in and out of each of the stock markets, but because of traders’ willingness to get into or out of the ...

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