The foreign exchange markets are truly a global market; bigger than any other securities market. So when thinking about equities and their influence on forex markets, you truly have to think globally. The best companies to consider are naturally the ones with international operations that transact in various currencies. For example, as the biggest retailer on the planet, Walmart deals with foreign exchange issues just as much as any other company you could think of. Another great name is Coca-Cola. These global consumer stocks transact with consumers all over the world and provide the best corporate glimpse into the forex market.

The commodities market can also be useful with respect to the forex market. Consider the main global commodity, crude oil. Global oil prices are denominated in U.S. dollars. As an example, the price of oil can spike because the value of the U.S. dollar declines relative to major global currencies. So the price of oil has to go up in order to equalize the price that other foreign countries buy in their home currencies. While other global commodities—sugar, corn, and wheat—offer similar insights, oil is the most significant commodity that relates to the foreign exchange markets.

A major equity market can also influence forex markets in another way. A weak currency favors exporters in that particular country. When your domestic currency is weak, exports are cheaper abroad. That helps fuel the growth and profits of those exporters. When earnings are growing, equity markets tend to do well. Of course, the situation is most likely to occur in equity markets backed by the major global currencies: the U.S. dollar, the yen, the euro, and the British pound, among others.

While stocks may be traded globally, the market for equities is largely national rather than international. Forex, on the other hand, operates on a global market. This is aided by the fact that forex trading occurs 24 hours a day, so that it is possible for forex traders to trade across any currency depending on the time of day and what brokers are active. On the other hand, while there are typically thousands of stocks to choose from on a single exchange, forex trading revolves largely around 18 pairs of currencies that have particularly high liquidity. The 18 pairs of high liquidity currencies are USD/CAD, EUR/USD, USD/CHF, GBP/USD, NZD/USD, AUD/USD, USD/JPY, EUR/CAD, EUR/AUD, EUR/JPY, EUR/CHF, EUR/GBP, AUD/CAD, GBP/CHF, GBP/JPY, CHF/JPY, AUD/JPY, AUD/NZD. So these are all the mostly traded pairs.

Forex and Share markets are entirely different markets; there is a significant relationship between the stocks and the forex market. The performance of the domestic currency is directly correlated to the performance of the country’s stock market. When a country’s stock market performs well, there will be capital inflows from foreign investors who intend to earn higher returns.

To invest in the domestic economy, the foreign investors will have to convert their money into local currency; hence, increasing the domestic currency demand in the forex market. In turn, the value of the domestic currency will also increase.

Conversely, when the stock market is on a downtrend, it will result in capital flight by foreign investors who want to avoid further losses. The capital flight can also result from foreign investors’ profit-taking when they believe that the stock market has reached its peak. When exiting the domestic stock market, the foreign investors convert their capital to other currencies, which results in an increase in supply in the forex market hence depreciation. Furthermore, when the stock markets open, it coincides with the Forex market hours in different time zones. During these forex sessions, forex pairs with the domestic currency experience higher liquidity than when the local stock markets are closed.

Forex market is a huge ocean of institutions, investors and consumers trading currencies. Movements in the market reflect the total demand for one currency relative to other currencies.

Currencies only rise or drop relative to other currencies. When people say the pound is weak, they’re speaking in reference to other major currencies. So, for instance, the pound could drop in value relative to dollars, while remaining the same against some other currencies.

There are lots of factors that influence currency movements, including:

• Whether a currency is inflationary (i.e. loses buying power over time)
• Central bank interest rates (relative to interest rates in other countries)
• Consumer demand for spending in that currency
• Whether a country imports or exports more
• Simple trading momentum in the short-term
• Demand for assets and investments priced in that currency

To apply these factors to the recent pound decline: if investors don’t want to buy UK-denominated assets, like property or UK government debt, or invest in the UK, then the demand for pounds goes down.

If consumers and companies don’t want to or can’t import as much from the UK, then the demand for pounds could go down too. All this means that currency performance can often (but not always) reflect the world’s opinion of a country’s economic future.

That’s not necessarily what’ll happen, but these sorts of predictions seem to be the calculation the market is making right now, or at least what they fear. In theory, currency moves should have a balancing aspect. When currencies weaken because of economic concerns and lack of demand for assets and exports, that makes those assets and exports relatively cheaper, stimulating demand again.