Economic Growth or FX Trick? 20-Nov-2014

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.