Using stocks to trade forex
What stock market moves say about risk appetite and currency flows.
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Lessons
- 01Stock markets and risk appetite.Risk appetite is how willing investors are to hold assets that can fall sharply, such as shares. When stock markets drop, investors often close carry trades funded in low-rate currencies and bring money home. The Japanese yen and Swiss franc then tend to rise, while the Australian and New Zealand dollars fall. This is a tendency, and it sometimes fails.
- 02Equity flows and currencies.When foreign investors buy a country's shares, they usually have to buy its currency first, which adds demand for that currency. When they sell and take the money home, they sell it again. The effect is weaker when investors hedge currency risk, and other forces such as interest rates can outweigh it.