Stock market fluctuations can be caused by a number of factors, including political uncertainty, economic data and even exchange rate fluctuations. Exchange rates influence every market differently, and there are several reasons for this.
Companies may sell more product in one country than another, which can lead to the product being underpriced as a currency falls. As the dollar strengthens, higher exchange rates in the U.S. often mean higher prices and lower profit margins for a publicly traded company that sources its raw materials from the United States.
Examples of how exchange rates can move markets are:
Mexico’s peso
Mexico’s peso to equities correlation is low at 3.8%. But correlation of the peso and stock market since 2000 is around 26.5%. We've seen some stocks be more sensitive to fluctuations, and this is often due to currency exposure.
Stock prices fall on a weakening peso due to higher dollar-denominated debt concerns and the concern that a falling peso may damage profitability and growth.
U.S. dollar and the S&P 500
A strong dollar improves the S&P 500, which was seen when President Donald Trump won the election. The S&P 500 rose to record highs multiple times in the first month following his election.
And there were multiple factors at play. Business tax breaks are certainly one reason for stocks rising, as companies expected to receive a generous tax break, which was realized after Trump assumed office.
The dollar also rose some 3% during that period, further strengthening stock markets. American companies benefit from a higher dollar, which has a higher purchasing power when the greenback rises and other currencies don’t outpace it.
The US dollar, as it strengthens, is beneficial in US stock markets and for forex brokers.
Sterling and the FTSE 100
The sterling has a different correlation with the FTSE 100. A quick look at Brexit demonstrates the correlation between the two. The pound fell in the three-month period following Brexit, yet the stock index rose nearly 3%.
A key factor in the market rising is that FTSE 100 companies often benefit from a lower sterling, as the majority of their revenue is in foreign currencies.
The money is worth more as the sterling drops and foreign currency is converted back into pounds.
If a foreign currency is strong, dropping against the sterling, when it’s converted back, it will provide a better return as the foreign currency has strengthened.
Disclosure: The author does not have any stakes in the listed equities.
