Most people use the performance of a particular stock index to talk about the performance of the stock market as a whole. Those indices are set up as shorthand for how the overall market is doing, so it makes sense that people refer to them in that way.

In today’s lesson, we will look at how the Forex market has a direct impact on two specific indices.

  • The Nikkei 225 (aka the Nikkei) – This is Japan’s main index. It measures the performance of the 225 largest companies in Japan.
  • The Dow Jones Industrial Average (aka the Dow Jones) – This is the performance of 30 large American companies presented in an index.

Nikkei and USDJPY

Before 2007, the Nikkei and the USDJPY were inversely correlated. When one went up, the other went down. That was all before a global recession in 2008 and 2009 that roiled the world and changed almost everything, but at the time it was true.

After the recession, the Nikkei and USDJPY started to move in tandem with one another. It now seems that stocks in Japan and the performance of the USDJPY are very closely related to one another.

Correlation Between USDJPY and the Dow

A rising dollar is not necessarily great news for the Dow Jones stock exchange. It is made up of the largest companies in the country, and those companies often rely on international sales. Thus, a higher dollar means they generate fewer profits on their international sales. As such, a falling Dow Jones index might actually be good news for the USDJPY pair.

However, the correlation is not quite as strong as you might imagine. Just check out the chart below, with USDJPY in blue and the Dow in orange.

The Dow Jones stood at 14,000 in late 2007 before falling hard in 2008. The USDJPY also fell during that time, but not as much as the Dow Jones.

Thus, it is important to always remember fundamentals when looking at the movement of various currencies and comparing them to the movements of stock indices. Sometimes, there are larger forces at play than you may realize. It is important to realize that when you are looking at how different asset classes relate to one another. It might not always be as smooth or crystal-clear as you might want to believe.

 

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