When equity market news impacts the FX market

The FX market is often impacted by the equity market, and vice versa. The share price of a stock company can for instance drop if the company is predicted to become adversely impacted by a strengthening of the national currency against the currency of a major import market. Conversely, the FX market can react in various ways to new released by enterprises.

One well-known example of the interconnectedness between FX and equity is the long-established inverse correlative relationship between the Japanese Yen (JPY) and the Nikkei 225. Nikkei 225 is the most famous widely quoted index for the Tokyo Stock Exchange and has been calculated since 1950. When the Nikkei 225 is going down, the value of the JPY against other major currencies will typically rise.

worldMergers & Acquisitions

Huge mergers and acquisitions can impact the FX market if they involve significant amounts of one currency being exchanged for another.

A study by Breedon and Fornasari, published in the year 2000, showed that mergers and acquisitions that involved cross-border deals in excess of 1 billion USD on average caused a 1% appreciation in the domestic currency of the target company. As soon as such a deal was announced, a strong upward movement could be seen in the domestic currency of the target company.

One example is when Procter & Gamble, an enterprise based in the USA, acquired a 77% ownership in Wella AG, an enterprise based in Europe. On the day this deal was announced, we could see a 100-pip surge in the EUR/USD. In the following week, the EUR/USD surged with another 100 pips.

Today, it is quite common for large deals to be cash + stock or cash + stock options instead of just cash. This decreases the amount of cash involved, and thereby also the deal’s expected impact on the FX market.