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How Fluctuating Currency Exchange Rates Can Affect the Stock Market
It isn’t common knowledge, but fluctuating currency exchange rates can influence the stock market. For example, in 2015 the Central Bank of Switzerland had a major impact on stock markets as they abandoned their policy of keeping the value above the Swiss franc down compared to the Euro. By the end of the 15th, the franc was approximately 15% stronger than the previous day. Most types of currencies do not move more than a few percentage points each day so the franc’s change in such a short period time was massive. Several stock market companies took a major hit in the Swiss market, particularly companies with major exports like Nestle and Swatch.
Rising currency values make exports more expensive for buyers
This Swiss case study is an excellent example of how rising currency values can affect the stock market. Rising currency values make a country’s products more expensive for those who are buying them overseas. For example, the US dollar is weaker when the Swiss franc is valued higher, and Swiss watches and other Swiss products become more expensive for those in the United States. This usually results in consumers buying fewer products. Rising currency values often ends up being bad news for exporters. Also if any country heavily depends on exports, quickly rising currency values can be devastating to their stock market.
Rising currency values make sales numbers weaken
The other downside when currency exchange rates rise is that sales numbers become weaker for many exporters. For example, 1 million dollars in sales in a prior month will have a lower value if a currency becomes stronger in the following month. This means that sales numbers will be weaker if a currency keeps rising, and that also has a negative impact on stock market values in many cases. Switzerland has several companies that earn most of their revenue abroad and these companies had weaker sales numbers when their currency rose. For example, Nestle earns over 97% of its revenue from foreign countries outside of Switzerland.
Large companies can hedge against currency increases
This certainly does not mean that large companies are at the mercy of their central banks or their country’s currency exchange rates. For example, large companies can hedge to their exposure to currency changes by purchasing securities that increase in value when their country’s currency rises in value. There are also other ways to hedge against increases in currency values. On the other hand, importers, will often prefer their currency to be stronger because they can purchase more of other countries’ exports at a lower price. So, other companies may increase in stock value when currencies rise.
Many other factors influence stock market values
There are many other factors that play major roles in how stock market values rise and fall, but the currency exchange rate is certainly one of the biggest ones. If you are interested in learning more about currency exchange rates, or if you have any questions at all about buying currency or timing a currency purchase, be sure to contact us today.