One of the ways the forex affects stock prices | Forex Intermarket Analysis

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One of the ways the forex affects stock prices

Investors tend to suffer from a common malady of "trader myopia." or tunnel vision. They pay attention to the market they are in to the exclusion of others around them. This is a mistake and I have a good example between the currency and stock markets for this article. In my experience I have found that stock traders have a lot of misconceptions about the currency market and this is understandable. Trading currencies or forex is very different than the kinds of investments they usually make and they may not be aware of how currency fluctuations can hurt or help them. Mexican Peso

Over the last few years it was very fashionable for stock investors to buy "international" or "global" equity funds. The rise in price was extraordinary and until the global (including the US) stock markets began to contract in 2007 followed by the collapse in 2008 the trend looked solid. Recently, a new disruptor has emerged to further depress many international stocks and that is a strong US dollar.

Traders have been noting the dramatic rise in the value of the USD against most other major currencies recently. Some currencies have devalued against the USD very quickly, including the Mexican Peso (MXN). You can see a chart of the USD/MXN exchange rate below showing a near 20% decline in the value of the peso against the USD. The decline in this case, occurred over a period of 5 trading sessions.

USD/MXN forex exchange rate - Daily chart

This kind of price movement is symptomatic of volatility in the capital markets in general but it has a double impact on some ADRs. An ADR is a stock trading on US exchanges for a foreign firm. ADRs like most stocks are struggling right now but a shift in an exchange rate like this can impact prices even more. For example, the chart below is of Cemex a world leading cement manufacturer headquartered in Mexico. Their ADR, which is listed on the NYSE as the symbol CX has been suffering from a decline in equity prices as well as a weakening currency.

Cemex (CX) - Daily chart
Cemex CX

This is a problem for CX because as the dollar gets stronger it takes fewer USD to buy a share of CX in Mexico. Since the ADR listed in the US represents the Mexican stock it drives its value down in real dollar terms as well. This could lead to a number of issues the most urgent of which is that if CX is cut off from being able to raise capital in the public markets because of a declining stock price they may not be able to finance operations as planned or make good on their own significant debts.

Knowing how these two markets interact is also a positive for investors. A dramatic shift in an exchange rate like the one we are seeing here is a significant warning sign that there is additional risk in the ADRs from that economy. Knowing what your risk is and how to quantify it is the first step to be able to manage it within your own portfolio. In the video I will go into more detail about what kinds of things a trader should look for when big market adjustments like this appear.

For more information about what an ADR stock is, see this article here.

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