Index traders would be wise to keep their eye on Forex rates; there are circumstances in which a weak currency leads to an index rising and vice-versa. Let’s take the example of the Nikkei225; in 2014 the value of the US Dollar soared against the Japanese Yen – earlier in the year the exchange rate had been around 1:102 whilst by the end of the year it was hovering at a level of about 1:120. However, at the same time the Nikkei225 went from strength to strength in 2014, moving from a 14-15k level to almost 18k by the end of the year.
What’s the reason for this contrast between a country’s currency and its primary index? The answer is that the decline in the Yen’s strength may well have played an active part in the Nikkei’s rise. Japan’s economy is largely based on exports, and a weaker exchange rate for the primary currency benefits importers, since they can sell their products for a lower price in foreign markets whilst still making a similar profit on each sale in their own currency. In this case, the drop in the value of the Yen helped export-focused companies to perform more strongly, boosting individual stocks and therefore driving up the Nikkei as a whole.