STOCK MARKET AND FOREX CORRELATION

Stocks and indices are often used for predicting the currency market. No wonder, in this world of trading, everything is interconnected in one way or another. There's a connection between stocks and currencies. Say, if you want to buy shares of a Japanese company on the Tokyo Stock Exchange, you can only do it in the local currency. As a result, your currency will have to be converted into yen (JPY), which naturally leads to an increased demand for it. The more stocks you buy on the Tokyo Stock Exchange, the more demand for the yen. Conversely, the more the currency is sold, for whatever purpose, the lower its value.

When a country's stock market seems attractive, they start flooding it with money. Conversely, if a country's stock market is in shambles, investors run from it headlong, looking for more attractive places to invest. If one country's stock market performs better than another, capital will flow from one country to the other. This will have an immediate effect on their currencies. Where the money is, the currency is stronger, where the stock market is weak, the national currency weakens.

A strong stock market causes a strong currency.
A weak stock market - a weak currency.

Key global indices
Let's take a look at the key world indices that interest us. As you will notice, many of them correlate and complement each other.

Dow Jones Index
The oldest and the most famous index in the world. There are actually several of them, but the most popular one is called the Dow Jones Industrial Average (DJIA).
It is the key U.S. stock index, which unites 30 companies with publicly available shares. By the way, despite the name, these companies are not particularly connected with the industry, because it is not in favor now. There are simply 30 of the largest companies in America.
This index is closely watched by investors around the world. It is a great indicator of the entire state of the U.S. economy, reacting to local and foreign economic and political events. The index tracks incredibly wealthy companies, you've heard of most of them. McDonald's, Intel, Apple are all in there.

S&P 500 Index
The Standard & Poor 500 Index, also known as the S&P 500, is one of the best-known indices on the planet. It is a weighted average price index of the 500 largest U.S. companies.
In fact, it is a key indicator of the entire U.S. economy and it is used to judge its performance. The S&P 500 Index (SPX) is the most traded index in the world after the Dow Jones Industrial Average.

Nikkei
The Nikkei index is like the Dow Jones Industrial Average, but for the Japanese. It averages the performance of the 225 largest companies in the Japanese stock market. Typical representatives of the Nikkei are Toyota, Mitsubishi, Fuji and others.

DAX
Deutscher Aktien Index is index of the German stock exchange, which includes 30 "blue chips" the largest companies whose shares are traded on the Frankfurt Stock Exchange. Germany is the most powerful economy in the EU, so if you are interested in the Euro, you should watch the DAX. The index includes companies like Adidas, Deutsche Bank, SAP, Daimler AG and Volkswagen.

EURO STOXX 50
The Dow Jones Euro Stoxx 50 Index is one of the key indices in the eurozone, reflecting the success of major EU companies. The index includes 50 companies from 12 EU countries.

FTSE
Financial Times Stock Exchange, also known as footsie, an index of the largest companies listed on the London Stock Exchange. There are several variations of it (which is often the case with indices). Let's say the FTSE 100 includes 100 companies and the FTSE 250, respectively, includes the 250 largest companies in the UK.

Hang Seng
The Hang Seng Index (HSI) for the Hong Kong Exchange shows changes in the prices of companies listed on the Hong Kong Exchange. The index includes the 50 largest companies with a capitalization of 58% of the total volume of the Stock Exchange.

The relationship between the stock market and the Forex
Now let's see if we should take all these indices into account when working with currency pairs. Of course, you should to determine general market trends at higher timeframes (remember multiframe analysis). In general, when the stock market is on the rise, investors are more willing to invest in it, buying the national currency. Which leads, of course, to its strengthening.

If, however, the stock market falls inconsolably, investors take their money, converting it back into their currency and the national currency weakens. However, there are two exceptions the U.S. and Japan. The economic growth of these countries often leads to the fact that their national currencies are weakening such a funny paradox, nevertheless, related to certain economic mechanisms. Let's look at how the Dow Jones Industrial Average interacts with the Nikkei.
As you can see, the DJIA and the Nikkei 225 are following each other. Moreover, sometimes the movement of one index anticipates the movement of the other, which allows you to use such a miniature time machine for making predictions.

Let's see other examples:
USD/JPY and DJI

USD/JPY and NI225

EURJPY and STOXX50

GBPJPY and FTSE100

Correlation can be regarded as an additional indicator of the global market trend. If the indicators of two interrelated assets diverge, it is much easier to determine the trends of each by methods of technical analysis. And you already know what to do with trend lines.

Let's look at some popular correlations between commodities and currency pairs.
Gold is up, the dollar is down. In economic crises, investors often buy gold for dollars, which is always up.
Gold up, AUD/USD up. Australia is the second largest supplier of gold in the world, so the Australian dollar exchange rate is in no small part related to the demand for gold.
Gold up, USD/CAD down. Canada is the 5th largest supplier of gold in the world. Therefore, if gold prices are going up, the USD/CAD pair is going down (because everybody is buying CAD).
Gold is up, EUR/USD is up. Both gold and the euro are considered the "anti-dollar". Therefore, an increase in the price of gold often leads to an increase in the EUR/USD exchange rate.
Oil is up; USD/CAD is down. Canada is the largest oil producer in the world, exporting more than 2 million barrels a day, mostly to the U.S. If oil goes up in price, the pair on the chart goes down.
Bond yields are up/the national currency is up. It is quite clear: the higher the interest rates state bonds, the more they are purchased for the national currency. As the demand for bonds goes up, the exchange rate goes up.
The DJIA is down, the Nikkei is down. The US and Japanese economies are very closely linked and go up as well as down.
Nikkei is down, USD/JPY is down. Investors often choose the yen as a "safe haven" in times of economic trouble.

The stock market, the state of which can be analyzed through indices, is directly correlated with currency pairs. Studying their interaction, you can often find situations when these data diverge so that one index acts as a "time machine" for the other. What is important is not only the correlation itself but also the fact that its polarity changes from positive to negative and vice versa.