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Chapter 28, Part IV. Stock Market - Forex Relation Page 5

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 27, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    IMPLIED RISK INDICATOR


    Commander in Pips: Finally we come to the last topic. Here I will ask and you will answer, since I’ve explained to you in detail the foundation of the stock and currency market relationship.

    What comments can you give about relation between DAX-30 (or any stock market, since it highly related as with Dow as S&P500) and EUR/JPY?

    Pipruit: And why are you asking?​


    Commander in Pips: Because there is an opinion, that since EUR/JPY has solid correlation with the stock market during last decade – it could be used as some kind of risk barometer in the world economy and it’s implied as risk indicator. How could you assess these thoughts from the perspective of all that we’ve discussed?




    Chart#7 | DAX-30 and EUR/JPY Monthly
    [​IMG]


    Pipruit: Well, correct me if I wrong, but based on your explanation I understand that the stock market is a result, but not the reason. The reason is economic health – both world and domestic. Stock market is just a single indicator of health among many others, and we can’t affirm that it is the most reliable – the recent behavior clearly shows that. The most reliable issue that allows to judge about the economy is macro data and its stability. That’s why we see great divergence between major stock markets and currencies. This growth should warn us, since it has no solid foundation.

    Since in 2002-2008 all stock markets were in a bull trend – we see appreciation of currencies as well, but this behavior is mostly based on the world’s economy growth stage, since the stock market is just an indication of this event.

    Probably, we might say, that risk indicator is a bit wider than just EUR/JPY. Risk indicator is safe-haven currencies – mostly CHF and JPY. If we will take a look at this period in the Dollar Index, then we will see that it was in down trend and didn’t support this rally. Probably that may come from too huge of a supply of USD, so even demand for it during the stock market boom can’t trigger a reversal in its value. This is tells about solid US Dollar overvaluation. We can’t call it as hidden, since it could be clearly seen, but probably we might say that the world is happy with this overpricing just yet.

    Nevertheless, we see some growth appetite for USD during risk aversion periods, like in 2008, but it much smaller than in JPY and CHF.
     
    #1 Sive Morten, Dec 27, 2013
    Lasted edited by : Oct 8, 2016
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