When the stock market has gone up from 6,400 [GBP] to 6,700 [GBP] in UK market, many people recognize this fact as positive news.
Probably, it would be positive new or at least not negative. However, if GBPUSD has moved from 1.6136 to 1.5414 at the same time, the stock market price in USD is unchanged at 10,327 [USD].
USD is still a key currency in the global market, and it could make us to discover the gap between real economy and stock market trend.
First example is NIKKEI 225, Japanese stock index. Since early 2013, BOJ started large scaled QE in the financial market, aimed at economic growth.
Nikkei 225 index had gone up both in JPY and USD that time.
However, since another QE announcement at the end of last Oct, Nikkei 225 has largely gone up in JPY but not in USD. Correlation between Nikkei 225 in JPY and USD is lower at the moment comparing with 2013.
This implies that the market jump in 2013 has economic growth or expectation but the jump since last Oct is caused by FX effect in USDJPY. While Nikkei 225 is going up in JPY, USDJPY is going down to offset the value in USD.
Another example is S&P ASX 200 in Australian stock market. Most of the period since 2004, correlation between the index in AUD and USD is higher except for the period from 2013 to early 2014. RBA had cut Australian interest rate since 2012 to 2013, and AUDUSD had gone down.
Looking at the stock index, value in AUD had gone up in stable pace during 2012 to 2013 while value in USD had moved in more volatile pace. The correlation between value in AUD and USD has
been relatively smaller in the period.
Assuming USD is a key currency to measure the value, economic growth or expectation had been unstable during the period, and it is probably true considering uncertainty in Chinese market and European debt crisis.
Common point in both Japanese and Australian stock market is that the central bank provide liquidity into the financial market by monetary policy or quantitative easing in the particular period. In such period, actual value of the local currency can be changed and it makes stock market jump even if the value of stock unchange.
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Trend & Momentum
indicators are represented in four types of signals, which are Upward (Steep), Upward
(Flat), Downward (Flat) and Downward (Steep).
However, the most major indices, FTSE 100 and Dow Jones Industrial Average, are described with triple top for last 18 years. Applied trend & momentum fitting, the right figure implies somehow market cycle is observed and the current market seems be near the top of a cycle.
The latest trend & momentum indicates EURAUD is turning into downward trend gradually in next one week, targeting around the range 1.42 - 1.43.
AUD has been stronger than major currencies, USD, EUR, GBP or JPY for last one week. NZD has been stronger as well as AUD.
Needless to say, now global economy is facing the most difficult situation in the history. Central banks in major economic zone, such as US, UK, Eurozone and Japan, have kept interest rate at record low level for long time since Lehman crisis 2008. Not limited to monetary policy, they also brought Quantitative Easing (QE), buying risky assets in the market.
USD has been stronger against most of major currencies, EUR, GBP, AUD and particularly JPY due to BOJ announced additional QE since end of last month. Japanese stock market also has shot up.
This QE may have aspect of JPY devaluation. They plan to increase their exposure of ETF and J-REIT in three times scaled pace. Simply say, if they are buying less credit asset by their JPY, value of JPY will be degraded and cross currency against JPY will be relatively going up.
