Chapter 1 : How Does The Stock Market Affect Forex?


You as a Forex trader spend a lot of your time looking at the fundamental and technical analysis but, have you ever come across traders who also keep an eye on the stock market?

You might have even spoken to some of them inside our Trading Room.In this lesson, we will explore the reasons why many traders consider there to be a connection between the stock and Forex markets.

What is the Stock Market?

For traders not familiar with the stock market, it can be defined as a place where investors buy and sell shares (stocks) in public organisations.

In more simple words, a stock market is a place where companies like Microsoft sell small pieces of themselves with the intention to raise money for a variety of things such as inventing new products, building new factories, expanding to new countries, or hiring more people.

And anyone including you, me, your gran, your wife, your girlfriend can buy those pieces.When you purchase stocks in a company, you become a part-owner. And when a company in the stock market makes money, everyone who owns a piece of that company profits too.

You might have heard of people buying stocks at Zoom at the beginning of the pandemic and their accounts blowing through the roof a couple of months later.For those who haven’t heard, here’s a graph of what happened with Zoom throughout the global COVID-19 pandemic.

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With that said, the stock market, just like Forex is all about strategy, thorough analysis and the right timing.

You profit from owning stocks when the share price increases, and if the company’s profits fall then so does the price of your shares.So now that you understand what the stock market is and how it works, let’s explore what the most popular stocks are and why.

Only then, you will be able to understand how and where the stock and Forex market correlate.

What are the most popular Stock Indexes?
There are millions of companies in hundreds of countries around the world selling stocks, and they are all listed under certain stock indices.

What is a Stock Index?
A stock index is a measurement of a section of the stock market. Generally, it will show the weighted price average of your chosen stock and can be classified in a number of ways.

  • World index – This includes stocks from all around the world.
  • National index – This represents the stocks of a nation.
  • Regional index – This include local companies within certain regions.

With that out the way, let’s discuss the most popular stock indexes worldwide.

NIKKEI 225 (Japan) -Nikkei 225 is the most popular index in Japan consisting of 225 companies.These include organisations such as Honda, Mitsubishi, Toyota and Sony.You can find the full list here.

It is currently the most widely quoted average of the Japan stock Market.

Correlations between Nikkei and USD/JPY
Nikkei and USD/JPY have been showing a strong correlation for many years now.

For example, before the economic recession in 2007, when economies around the world experienced countless months of negative GDP growth, the Nikkei 225 and the USD/JPY were inversely correlated.

Traders and investors believed that the Nikkei stock market was a good reflection of the economic state of a country.So if Nikkei 225 were to rally then it would lead to the strengthening of the Yen and therefore the USD/JPY dropping.

And it also worked in the opposite direction. Whenever the Nikkei would drop, the value of Yen would weaken and USD/JPY would rise.

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However, after the financial crisis, the correlation between Nikkei and USD/JPY went crazy like Britney Spears.

They no longer moved oppositely, but instead, they have moved in the same direction since. Just take a look at the image below.

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Incredible, right?And that’s just one example of how stocks and the Forex market correlate.

Dow Jones (US) -The Dow Jones Industrial Average or Dow for short is like the caviar of the stock market.

It is one of the most notable and premier indexes traded in the US and are widely used to determine the industrial performance of the US economy.

It has 30 components and tracks the price movements of the 30 largest and most influential U.S. companies in the stock market. These include Disney, Coca-Cola, Boeing, McDonald’s, Microsoft and many more. You can see the full list here.

Correlations between Dow and USD/JPY
The strength or weakness of the USD has an impact on the United State’s stock market, especially stocks of BIG worldwide companies.For large U.S. companies that market products around the Globe, a rising U.S. dollar can put a dent in the profits.

Therefore, if the Dollar is strong, it makes it difficult for them to increase their prices or even maintain sales at the current level.

Wrapping Up
As a trader, it’s always beneficial to look for correlations between other financial markets.

These correlations can effectively indicate the price direction, which is useful when it comes to making trading decisions.

However, it is crucial you remember that correlations are not a sure thing and shouldn’t be taken for granted.




Chapter 2 : How Does Gold Affects the Forex Market?


Gold and Forex… Have you ever considered there might be a correlation between these two? It may seem unlikely if you are hearing about this for the first time but believe it or not, there IS a correlation.
And, SPOILER ALERT, Forex market and Gold mesh pretty well!Ready to find out more and explore how Gold affects Forex market prices? Keep on reading.

Understanding the value of Gold
First and foremost, Gold is one of the most traded commodities worldwide. Why?Traders believe that gold reflects the condition of economic and political stability. 

During times of economic crises, traders and investors tend to run a mile from trading the $$$ and seek safe-haven assets a.k.a THE GOLD. However, in times of economic prosperity and political stability, the opposite is true. Gold investors seek higher profits in other, more profitable markets such as Forex. 

Its price fluctuations majorly affect the 3 major currencies. i.e, USD, AUD and CHF.

Let’s take USD, for example.

Generally, when the US dollar goes up, the value of gold falls and vice-versa.So where can you see how the value of Gold is changing in comparison to the USD. 

It’s pretty simple!There is a very special Forex currency pair that includes Gold (XAU), and it is called XAU/USD.The XAU/USD pair tells traders how many US dollars it costs to purchase one Gold Ounce. 

And hell, is this an interesting currency pair to trade! Ask any trader and let them tell you about the massive liquidity of XAU/USD.

Now, how does Gold affect major currency pairs in Forex?

Let’s explore. 

Gold vs AUD/USD
A picture speaks louder than words so let’s place Gold and AUD/USD side by side on the same chart.

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Can you see how they move together?

That’s because Gold has a positive correlation with AUD/USD.

This means that if the value of gold goes up, so does AUD/UDS. 

If the value of Gold goes down, so does AUD/USD.

This correlation may be due to various factors, such as Australia being the third biggest gold-digger… sorry, gold producer worldwide, digging out more than $5 billion worth of the Goldie each year!

And historically, AUD/USD has had a massive correlation of 80% to the price of Gold!
That’s too big of a percentage for it to be a coincidence… 

Gold vs USD/CHF
Yup, that’s right. There is a correlation between the Swiss franc and Gold. But it is not free sailing like AUD/USD. 

In fact, Gold has a negative correlation with USD/CHF.

This means that if the value of gold goes up, the value of USD/CHF falls down.

If the value of Gold falls down, the value of USD/CHF goes up.

Again, this may be due to a number of different reasons. One worth mentioning, however, would be the fact that over 25% of the Swiss franc is backed by gold reserves.

One could say that Switzerland is the global hub for the gold industry and most of the gold in the world passes through Switzerland.

Isn’t that amazing?

And even if you are not interested in trading gold, it might be worth keeping an eye on it from time to time. You can check its current movements here.

In the meantime, just remember that Gold is inversely/negatively related to USD and positively related to CHF and AUD.And the relationship between gold and major currency pairs is just one of the many that we will tackle throughout this level. 




Chapter 3 : How Does Oil Affect The Forex Market?


Let’s talk about black gold.You may also know it as Oil.It runs through the veins of the global economy and is a major source of energy.

Oil is undoubtedly the world’s most heavily traded natural resource and the backbone of some of the largest economies. It has always had a massive impact on many aspects of finance, including Forex.

Oil is estimated to be worth just over $4 trillion a year in revenues.$4 trillion… 

It will therefore come as no surprise that oil has a significant impact on areas beyond the energy market.

One of the most evident correlations between oil and other markets can be found in nations that produce and export oil as a major part of their economy. 

These nations are mega dependent on high oil prices because a potential collapse could erode the value of their national currency.

And nobody wants that. For example, let’s take Saudi Arabia. If their oil exports were to collapse for whatever reason, the Saudi riyal’s value would drastically decrease as the country is super dependent on its revenue from oil. 

However, it is not only Saudi Arabia that is dependent on the oil industry. We have attached a list of the largest oil producers worldwide below.

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FUN FACT: A barrel of oil is priced in USD around the world. When USD is strong, it costs less to buy one barrel of USD. When USD is weak, the price of oil is higher in dollars.

Many financial experts worldwide believe that the U.S. dollar is becoming a Petro currency.

A name was given to currencies of nations such as Russia, Canada, or Norway that export SOOOOOO much oil, that the profits from it make up a huge part of their overall economy.

Now, I dare to say that it is clear to see how the price of oil is related to the price of the US dollar.

But… what about currency pairs? Well, there is a correlation too!

Let’s take a closer look at the USD/CAD currency pair which Forex experts believe is strongly correlated with oil. 

Oil vs USD/CAD
Did you know that Canada exports more than 3 billion barrels of oil to the U.S. every day? 

This makes Canada the largest supplier of oil to the United States, and well, U.S. the largest oil dealer out there.

Now, due to the volumes involved, this creates a massive amount of demand for the Canadian $$$ (CAD).Because of this, USD/CAD is super vulnerable to how consumers in the United States react to changes in oil prices.

Let’s talk examples.

If the demand for the United States increases, manufacturers will need to order more oil to keep up with the increasing demand. This can then lead to a potential rise in oil prices, which may lead to a fall in USD/CAD.

If the demand in the United States decreases, manufacturers may decide to slow down with the oil orders which may effectively hurt demand for the CAD.

You can clearly see that oil has had a negative correlation with USD/CAD.

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This has been the case since 2000 and it was especially visible from 2000 to 2016 when it was 93% negative. In practice, this then means that when the value of oil increases, USD/CAD falls.

And when the value of oil goes falls, USD/CAD increases.

Take a look a the chart below to see what it looks like on a chart side by side.

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Incredible, right?
So, the next time you’re topping up your car and you see the oil prices rising, it may be the right time to go short on USD/CAD… 

Even if you don’t want to place a trade, have a look at that USD/CAD chart to see if the negative correlation is still there!

There is no denying that oil is one of the most important commodities worldwide and it will undoubtedly continue to shape economic trends for decades to come.




Chapter 4 : Does the Bond Market Affect Forex?


Bonds are a form of debt instrument used by large companies, governments and multinational organisations to access low rates of interest on funds they need to borrow in return for a fixed rate on their principal.

Let’s say you own a government bond. If the government has taken a bond, essentially it borrowed money from you,Now, you might be thinking it sounds pretttyyyy similar to stocks.

The main difference is the fact that when you borrow a bond, you will have a predetermined set date by when you need to pay the money back.

This will usually consist of payments at a specified rate of return, also known as the bond yield, at certain time intervals.These payments are also known as coupon payments.

What are Bond Yields?
Bond yield is the interest paid to the bond-holder after the maturity period while the bond price is the sum of money the bondholder pays for the actual bond.

It is important to note that bond prices and bond yields are inversely correlated.
This, therefore, means that when bond prices rise, bond yields fall and when bond prices fall, bond yields rise.

Below is a mini illustration to help you remember this inverse correlation.

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Now, let’s get to the core of this article and talk about the bonds relation to the Forex market.

Bond Yield vs Stocks
Bond yields serve as an indicator of the strength of a specific country’s stock market, which increases the demand for the country’s currency.In simple terms, this means that when the bond yields fall, it shows a slow down in the economy and therefore low currency value.

This prompts the Central bank to increase interest rates, and high-interest rates mean currency appreciation.

For instance, the United States bond yields gauge the performance of the United States stocks market, and therefore reflects the demand for USD.

Let’s talk examples.

The demand for bonds generally rises when the stock market becomes riskier.The uncertainty in the stock market drives the bond prices higher and, by virtue of their inverse relationship, pushes bond yields down.

As more and more traders sail away from stocks and other risky investments, increased demand for ‘less-risky-instruments’ like U.S. bonds and the safe-haven USD pushes their prices UP.

What are bond spreads and how does it correlate with Forex
Bond spread can be defined as the difference between two countries’ bond yields.

By monitoring these bond spreads as well as interest rates, traders can get an idea of where currency pairs are headed.

A picture speaks a thousands words so let’s see what we mean by that on a chart by putting the AUD/USD side by side with the bond spread between Australia and United States.

You can clearly see that the bond between the given economies widens, the currency of the country with the higher bond yield appreciates against the other currency of the country with the lower bond yield.

Can you see how the bond rose from 0.5 to 1.0 from 2002 to 2004?

And at the same time, AUD/USD rose almost 50%, rising from 0.5 all the way to 0.7.

And then the same thing happened in 2007 and the bond rose from 1 to 2.5, whilst the AUD/USD rose from 0.69 to nearly 1.00.That’s about 2,000 pips!

Not too bad, right?

However, when the 2008 recession came along and all the major central banks started to cut their interest rates, AUD/USD went from the 0.9 handles back down to 0.7.

Why did it happen?

Because traders tried to make the most of carrying trade so when bond spreads between the Aussie bonds and U.S. Treasuries were increasing, traders loaded up on their long AUD/USD positions.

Final words
We know that if this was your first time hearing about the Bonds Market, it might have seemed pretty confusing.

But don’t let this put you off! Just like with everything else, it gets easier in time!




Chapter 5 : How Do Fixed Income Securities Affect Forex?


As we touched on in the previous lesson, rates of return can often serve as a reliable indicator of currency price movements.

When the bond spread between the given economies rises, the currency with the higher bond yield will normally appreciate against the other.Fixed income securities are debt instruments that pay a fixed amount of interest to investors until their maturity date.

Now, economies of countries that offer higher returns on their fixed income securities, therefore, attract more investors than countries that offer lower returns on their fixed income market.

Let’s use UK bonds (Gilts) and European bonds (Euribors) as an example.

If Euribor were to offer a higher rate of return compared to Gilts, investors would be super excited to put their money into the EU fixed income market rather than Gilts.

This would therefore mean that EUR would strengthen compared to GBP.

However, if the tables turned, and Gilts were to offer a lower rate of return, investors would be discouraged from investing in them and they would invest in another higher-yielding asset instead.This would therefore mean that EUR would weaken compared to GBP.

We could compare the yields on the fixed income securities of Korea and Russia and use the differentials to predict the behaviour of the real and the ruble.

We could do this with any and every fixed-income security and predict their future movement.

IMPORTANT: REMEMBER IF YOU ARE COMPARING BONDS, USE THE SAME TERM TO MATURITY (E.G. 3-YEAR SWISS BONDS TO 3-YEAR CANADIAN BONDS) OR YOUR ANALYSIS WILL BE OFF.

If you want to look into bonds and these correlations, even more, check out the following websites.

They’re like the holy grail of Bonds.

Now, there are hundreds of different bonds around the world but we don’t want to confuse you too much talking about all of them.So for now, you might want to stick to bonds of countries that are a part of the majors.

We have listed them down for you along with their nicknames so it’s easier to remember!

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Chapter 6 : How Does Silver Affect the Forex Market?


As we discussed in the previous chapter, USD is negatively correlated with the prices of gold.

But what about Silver?

Yup! It is negatively correlated with Silver too.

And with Copper, Platinum, and well, most other commodities in general.

The reason for this is because most of the world’s commodities are quoted in USD.Therefore, when the USD rises against other major currencies, this tends to have a negative effect on commodity prices.And it works the other way too! During the periods of USD downtrend, the prices of metals tend to make some huge gains on the market.

But we always tell you to think positive and for the sake of this lesson, we will take our own advice and explore the POSITIVE correlations of Silver.

To kick things off, let’s take a closer look at Silver’s correlations with AUD/USD.

The correlations of Silver and AUD/USD
Before we dig deeper into Silver and Australia’s entanglements, it is important to note that Australia is not only in the top three Gold producers worldwide, but it is a MASSIVE producer of Silver too!

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That’s a lot of Silver, eh?

You can only imagine the impact such an amount has on the overall economy of Australia…Now, let’s compare the movements of AUD/USD and XAG/USD over the past 15 years and explore their correlations.

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Their movements have been prettyyyyyy similar over the past couple of years, wouldn’t you say?

Can you spot the positive correlation between the AUD and XAG prices?

It is pretty out there!

However, this does not mean that AUD and Silver will always move in the same direction and some days/months this may be more prominent than others.

For instance, if we take the same example from earlier, you can notice a certain degree of divergence between AUD and the prices of Silver at the end of 2019.

This was mostly caused by the repeated rate cuts of the Reserve Bank of Australia which significantly weakened the AUD.

However, things had started improving at the start of 2020 (well, between Silver and USD anyway) and the high degree of correlation between those assets had been restored.

Now, why don’t you check what the correlation between XAG and AUD looks like right now? You can check here.