What Stocks Are Saying About Currencies: A Smart Trader’s Guide

As a forex trader, you probably fixate on central banking authorities, interest rates, and the occasional political announcement; and yes, all of that matters. But what if I tell you that one of the most undervalued indicators of future moves in currencies is right in front of you, and it flashes signals at you every day? The stock market. More particularly, stock indices and equity sectors often indicate shifts about currency strength or weakness long before the forex market discounts them properly. We'll discuss how 'to listen' to stocks and how astute traders can exploit that information for their trade setups.

1. A Hidden Relationship Between Equities and Currencies

At first glance, you might think stock markets and forex are two separate worlds. One hovers around the performance of companies. The other concentrates its efforts on national economies. But if you peel back the layers, you’ll see a tighter relationship. Here’s why:

• Stock markets represent either economic optimism or fear.

A rising equity market goes hand in hand with economic growth and investor confidence. Such sentiment will usually attract foreign capital, which strengthens the currency associated with the local economy.

• Currencies can impact a company’s profit.

A domestic currency that performs well, may impact exporters by losing competitiveness (making their goods that much more expensive overseas), conversely, a weaker currency increases exporters competitiveness.

So, both markets are constantly relying on the opposite market. Stocks respond to shifts in currency, and currencies shift based on anticipatory movements from stocks.

2. Stock Indexes as Currency Indicators

Let’s use a real-world example to illustrate this.

Imagine that the Japanese Nikkei 225 is up rapidly over a period of weeks and the Yen is also weak. This may feel odd – you may expect that a stronger Japanese economy (in the form of stocks rising) will equate to a stronger currency?

Not necessarily.

In this case, the rise of Japanese stocks also may include optimism about future export-led growth. And a weaker Yen favors exporters –making their stock prices rise.

So what are the stocks telling you? That the currency weakness is probably conscious and will likely continue.

Another example: if the European equity markets are down, yet the Euro is flat, a good trader may suspect that Euro weakness is coming – as a slowing economic outlook starts to seep into the currency markets.

3. Sector Performance: A Much Deeper Drill

It’s useful to assess overall indexes, but to get even sharper insight consider which sector forecasts are strong or weak and which sectors are particularly sensitive to global economic conditions or currency price changes.

• Export-related sectors (such as industrials, technology or auto) – Strong performance in these sectors could signal an expectation of favorable exchange rates or increased demand on the international market.

• Financials – this often represents a forecast for changes in interest rates, which reflect currency strength.

• Commodity-linked sectors (such as energy or mining) – the lead of these sectors might indicate increasing demand for raw materials, which can often confirm commodities-linked currencies appear stronger-positive (AUD or CAD for example).

In other words, you don’t just want to know if the stock market is rising – you want to know why.The answer is often related to a currency trend which is primed to happen.

4. Investor Sentiment and Risk Appetite

Stock markets are a fantastic real-time thermometer for global risk sentiment—and risk sentiment is a potent force behind currency moves.

• When environments are "risk-on" (when investors are optimistic), money flows into higher yielding, riskier currencies, like the Australian dollar (AUD), New Zealand dollar (NZD), or emerging market currencies.

• When environments are "risk-off" (when fear rears its head), money flows into safe-haven currencies, like the U.S. dollar (USD), Japanese yen (JPY), or Swiss franc (CHF).

Watching the tone in the equities space can often give you a jump start. If stocks are on the rise, there is a great chance risk-on currencies will follow suit. If equities begin to tumble, expect a flight to safety on the forex side of things.

5. Earnings Season: A Goldmine of Clues

Another great time to be watching stocks is during the earnings season. When companies listed in major global exchanges release quarterly results, the context and sentiment that they are able to transmit is not just about:

• Global demand

• Supply chain pressures

• Currency impact on revenues

As an example, if many multinational companies mention currency headwinds (meaning the strong dollar is having an adverse effect on profits), there may be hints at future dollar strength ahead.Similarly, optimism in companies about demand in Asia or Europe could be a positive summer indicator for economic expansion in that part of the world and possibly have currency appreciation there.

6. Country Comparisons: Watching for Divergence

Forex is about relative strength. You're not asking, "Is the dollar strong?" You are asking, "Is the dollar stronger than the Euro?" or "Is it weaker than the pound?"

This is where comparing equity performance across countries provides considerable power.

If U.S. equities are running, while European equities are stagnating, it's reasonable to expect that the forex market will shift and reflect that divergence with a stronger USD to EUR. It could just as well be the opposite.

Intelligent traders often use performance of equities across countries when modeling currency pair movements in real-time before the majority can even wrap their heads around the situation.

7. Real World Case Study: The 2020 Market Crash

Let's use a real-world example to tie together.

As COVID-19 moved through early 2020, global equity markets were starting to fall HARD. This was one of the fastest risk-off transitions in market history.

Even without a central bank response, savvy forex traders already had the necessary knowledge:

• Equities markets were torpedoed

• Investor fear was heightened

• Safe-haven currencies were becoming more in demand - USD, JPY, etc.

• Risk currencies were collapsing - AUD, NZD, emerging markets, etc.

In this circumstance, the market on equities led the transition in sentiment, forex followed. Those who were paying attention to performance of equities would have put themselves ahead of the transitions in forex.

8. Practical Tips for Forex Traders Who Want to Watch Stocks

If you are unfamiliar with the concept of considering the performance of equities to inform your forex strategy, there are some simple, but practical ways to start doing this:

✅ Track the majors - the S&P 500, FTSE 100, DAX, Nikkei, Hang Seng, etc.

✅ Track sector leaders - financials, energy, tech, etc.

✅ Track global correlations - rising stocks in the U.S. + rising USD = risk-on; falling stocks in the U.S. + rising Yen = risk-off.

✅ Track follow-up to earnings releases - particularly where there is currency commentary.

✅ Track comparison of country indices - U.S. vs Eurozone, U.K. vs. Japan, etc.

Conclusion: Listening to Markets more Broadly

The best forex traders do not work with "currency" as a standalone function, they are macro detective so to speak. They know that markets don't operate in isolation, and equity performance will often manifest as changes in currency markets in the future.

If you start to broaden your scope to include equities markets, you create an advantage - more than speculation, this courage gives you an opportunity to pay attention to capital flow. Stocks do not lie. They respond quickly to insider expectations, and thus that response is built into the nature of price direction in currency.

So, next time you consider executing a forex trade, step back; observe the equities market. I can guarantee, at the very least, it is providing you a preview of what the working charts will ultimately tell you in the near future.