Exchange Rate Is A War Without Smoke.

Exchange rate refers to the ratio of the exchange between two currencies, and it can also be regarded as the value of a country's currency to another currency.

The exchange rate will fluctuate due to interest rates, inflation, national politics and the economy of every country.

The exchange rate is determined by the foreign exchange market.

In different economies, the relationship between exchange rate and stock market is different.

1, in the short term, the exchange market and the stock market are good friends.

From the short-term trend, the stock market and foreign exchange market of the emerging economies are rising or falling, that is, when the exchange rate depreciates, the share price falls and the stock price rises when the exchange rate appreciates.

In Russia, for example, in the first half of 2014, ruble dropped 38% against the US dollar, and the Russian RTS index also dropped 30%.

In the first half of 2015, ruble increased its value against the US dollar and Russia's stock index began to rebound.

After that, the rouble was again devalued sharply, and the index continued to record low.

Rubles and stock indexes have rebounded since 2016.

In the short term, emerging economies such as India, Philippines, Malaysia, Mexico and Indonesia are also in line with this rule: when the exchange rate depreciates, the stock market falls sharply.

Soaring.

2, in emerging economies, why does the stock market and foreign exchange market share their joys and sorrows in the short run?

First, exchange rate and stock market are barometers of real economy.

On the one hand, the quality of the real economy will be pmitted to the stock market.

When the economy is down, you can't expect the economy to skyrocket.

On the other hand, the quality of the economy will also affect a country's foreign exchange reserves and the ability of the central bank to intervene in the exchange rate, thereby affecting the exchange rate.

So when the economy is down, the exchange rate of emerging economies will be under the pressure of depreciation, and the stock market will also have a sharp fall. On the contrary, the good economic situation has boosted the stock market and the exchange rate.

For export dependent bulk producers, this rule is especially applicable.

Take Russia as an example, its economy is mainly dependent on energy commodities. GDP's 1/3 relies on the energy industry, and over 70% of its exports are energy products, so oil price is a key indicator affecting the real economy of Russia.

Judging from the trend, when the oil price rose, the rouble rose, the Russian stock index rose, when the oil price fell, the rouble depreciated and the stock market fell, so it showed that the Russian stock market and exchange rate were interrelated.

For example, during the period 03-08, oil prices surged, and stock prices and roubles also rose sharply.

Between 08-11, stock prices, roubles, oil prices all first fell and rebounded, and after 2011, the three trend downward.

Second, the rise and fall of the stock market will affect investors' confidence in the economic prospects of a country, leading to cross-border capital flows and thus directly affecting exchange rates.

The stock market plummeted.

It will not be optimistic about the prospect of a country's real economy. A large amount of capital will be withdrawn from the financial market and the real economy, leading to the risk of capital outflow and the depreciation of the local currency. Instead, the stock market will attract overseas capital inflows and increase investment, and the local currency may appreciate.

In 2008, the Indonesian stock market fell by 50.4%. It was estimated that the total size of funds coming out of Indonesia's financial market and real economy in 2008 was nearly $5 billion 500 million, while the Indonesian rupiah fell 14.4% against the dollar.

The stock market is down to the foreign exchange market. Who will not panic?

In addition to Indonesia, Mexico, India, Philippines and Malaysia all experienced exchange rate derogatory after the stock market crash in 2008.

Conversely, the foreign exchange market will also affect the stock market. Once the exchange rate changes too much, especially the currency devaluation of a country, the lack of investor confidence is directly reflected in the stock market crash.

If the exchange rate fluctuates sharply, it will have a negative impact on exports and even the whole economy. So the currencies of developing countries are mainly pegged to the US dollar, even if the central bank adopting the floating exchange rate system will intervene in the foreign exchange market frequently.

Moreover, only enough foreign exchange reserves can be able to cope with the impact of the financial crisis, which is also an important foundation for exchange rate stability.

Think about the Asian financial crisis. Due to the shortage of foreign exchange reserves, Thailand collapsed in the financial crisis, while Hongkong in China could retreat.

So a country's foreign exchange reserves are very important. Without this weapon, how can we fight against those evil forces who are trying to sell short?

In this regard, we must be vigilant against foreign exchange. Once the exchange rate devaluation sharply, it often shows that the deterioration of the economic situation and the decline in the ability of the central bank to intervene will constitute a major blow to market confidence and lead to a sharp fall in the stock market.

For example, since August 2014, the pressure of depreciation of Malaysia's ringgit has been caused by US interest rate hikes, oil price collapse and domestic corruption scandals.

Malaysia's central bank's ability to intervene in the exchange rate is weakening, and foreign exchange reserves have fallen from less than 120 billion to less than 90 billion, and ringgit has plummeted from 3.16 to 4.45.

Malaysia's stock market plummeted nearly 20% in 4 months.

Similarly, in the second half of 14 years, the ability of the Russian central bank to intervene in the ruble exchange rate weakened. The rouble had almost depreciated 40% against the US dollar in the two months of the year, and the Russian RTS index also plunged 29% during that period.

In reality, the deterioration of the economy in the emerging economies, the derogation of exchange rates and the frequent falls in the stock market often make it difficult to distinguish who is affecting them.

For shareholders, there is no time to retreat.

Whether it is the deterioration of the real economy, the derogation of the exchange rate and the stock market crash, it will severely hurt investors' confidence in the economy and lead to a chain reaction. So in the short term, confidence in emerging markets is more important than gold in the short term.

3, but in the long run, the long-term depreciation of the exchange rate can boost the stock market. Is it possible for investors to survive and survive for a long time in the face of exchange rate depreciation?

Although the stock market and foreign exchange market are in the same pace in the short term, in the long run, the depreciation of the exchange rate has released the risk, reduced the suppression of asset prices, and the stock market has risen instead.

The most important source of currency devaluation is that the currency is printed too much. How does the spammed currency push the stock market boom in the long run?

The increase of money supply will cause the price of social goods to rise, so that the sales revenue and profits of listed companies will increase correspondingly, so that the dividend expressed in monetary form (that is, the nominal income of stocks) will rise to a certain extent, which will increase the demand for stocks and increase the share price.

The excessive issuance of money will also cause inflation. Inflation tends to be a false market boom, creating a false impression of a general increase in corporate profits. A sense of value keeps people inclined to invest in precious metals, real estate and short-term bonds, and will also drive up share prices.

But the bubble will burst sooner or later.

For example, Argentina's exchange rate has been depreciating in recent years, and the stock market has been rising.

Since the beginning of 2013, the peso has depreciated by 66% against the US dollar and the stock index has risen by 328% in Argentina.

Although India's currency devaluation and stock market crash have been seen in the short term, the stock market has risen in the long run after the India rupee depreciated. Since July 11, the rupee has depreciated by 33% against the US dollar, while the India Sensex30 index has risen 32.5%.

In the long run, the situation in Mexico and Indonesia is also in line with this trend.

Since August 08, the Mexico Peso has depreciated by 44% against the US dollar, while the stock market has risen by 66%. The Indonesian shield has depreciated by 31%, while the Indonesian stock market has gained 122%.

Russia's experience also shows that both currency devaluation and stock market decline can release risks, which proves that opportunities are "down" and "derogated".

4, what financial risks will there be in emerging market countries?

The exchange rate angle is more worthy of vigilance. It is the risk of partial crisis.

Several financial crises caused by emerging market countries in history, such as 97 years of Thailand and 02 years of Argentina, will have an impact on global capital markets when their own crises break out.

In recent years, the global economy is relatively fragile, and the capital market has responded strongly to the crisis. When the two Greek debt crisis broke out, the global stock index fell synchronously, the S & P 500 fell 14%, the FTSE 100 index fell 16%, the Nikkei 225 index fell 20%, and the composite index dropped by 25%.

A further analysis of the financial crisis in Thailand is a typical small country crisis. The conduction order of the crisis is export deterioration, growth decline, external debt rising, stock market decline, treasury bond yields upside down, depreciation of exchange rate, house price decline, and the outbreak of the financial crisis.

1, in the short term, the exchange rate and stock market depend highly on themselves and have no definite relationship.

Take the United States as an example, during the period 03-07, the US dollar index decreased by 25%, and the Dow Jones index rose by 55%.

Over the past 08 years, the US dollar index has risen by 29%, the Dow Jones index has increased by 39%, and the exchange rate and stock index have been in the same direction.

There is no definite relationship between the euro exchange rate and the European stock market.

This is really an unpredictable relationship.

This is mainly because the United States and the European Union adopt the floating exchange rate system, so the exchange rate and stock market are both immediate reflection of monetary policy and real economy, and there is not much fluctuation.

For example, in April 28th, when Japan announced that it would not be overweight, the yen went up against the US dollar. Although the US policy did not change much, the dollar index still dropped sharply as the yen gained more weight in the US dollar index.

So the relationship between the exchange market and the stock market is not obvious.

Since 2008, because of the continuous economic downturn, policies have affected the fluctuation of stock market and foreign exchange market.

For example, after the financial crisis in 2008, the Central Bank of the developed economies continued to "drain" money, and the US Dow Jones index rose 105%, the Nikkei index increased by 90%, the German index increased by 115%, and the Financial Times index increased 44%.

At the same time, under the influence of loose monetary policy, the euro depreciated 18% against the US dollar and the Japanese yen depreciated by 16%.

Behind this monetary policy is pushing hands.

2, when the currency depreciates actively, the stock market rises, while the passive market depreciates.

When the market depreciates, the stock market rises.

In recent years, the devaluation of the US and Japan has all taken the initiative to depreciate and the stock market has risen.

The US subprime mortgage crisis has prompted the US Federal Reserve to open QE. Since December 08 to November 11, the nominal US dollar index has dropped 15%. In the US dollar 11 years, the total export volume of the US has increased 15% over the 08 years, which has exceeded the level before the crisis. The depreciation has stabilized the US exports, and during the period, the S & P rose 71%.

When the market depreciated passively, the stock market went down.

07 years from November to March 09, affected by the subprime mortgage crisis in the United States, the Korean fundamentals significantly deteriorated. GDP was negative from the year to year, with a sharp decline in the monthly export volume, a passive depreciation of the Korean won by 43%, and a 40% decline in the Korea composite index.

1. From historical data, the correlation between China's stock market and foreign exchange market is not high.

For example, after the reform in 2005, the exchange rate of RMB against the US dollar has been appreciating sharply. During that period, the stock market has risen from less than 2000 points to more than 6000 points, and then fell back to below 2000.

There is not much correlation between exchange rate and stock index, mainly because China's stock market trend is determined by the market, more influenced by economic fundamentals and monetary policy, and the RMB exchange rate is not floating freely, more importantly, it is managed by the central bank.

Especially after 2005, with the continuous advance of trade liberalization, China's trade surplus has been increasing rapidly. Foreign exchange reserves have risen to nearly 4 trillion from less than 1 trillion US dollars to the high point. The ability of the central bank to intervene in the exchange rate has been greatly enhanced, and China's rapid economic growth has made the RMB appreciate continuously.

So generally speaking, the RMB exchange rate is not only the embodiment of China's monetary policy and real economic growth, but also the embodiment of the central bank's intervention capability, while the stock market pricing is more market-oriented, and the correlation between the two is not high.

Since the "811" reform in 2015, the correlation between exchange rate and stock market has increased significantly.

In August 11, 2015, the central bank implemented a more market-oriented pricing method of the RMB exchange rate, and allowed the RMB to depreciate sharply against the US dollar in the next few trading days. Then China's stock market fell rapidly and the global market was also dragged down.

By the end of August 15, the largest decline of the yuan against the US dollar was 3.2%, while the Shanghai index fell by 18%.

After the intervention and management of the central bank, the RMB exchange rate stabilized and the stock market rebounded rapidly.

2, how does exchange rate reform affect China's stock market?

First, exchange rate changes affect investor confidence and then affect the stock market.

In recent years, China's economy is down and facing more structural problems, triggering worries about China's economic prospects.

The central bank has implemented a more stringent management policy for the RMB exchange rate. The depreciation of the RMB exchange rate not only affects investors' confidence in the central bank's ability to intervene in exchange rate, but also affects investors' judgment of China's economic prospects, leading to a sharp fall in the stock market.

Second, both the stock market and the depreciation of the renminbi will be influenced by the monetary policy of the Federal Reserve.

The Fed's interest rate hike will not only increase the pressure on the depreciation of the renminbi, but also make a negative impact on the stock market.

This is because the central bank's loose monetary policy has been a major driving force for the strong stock market in the past two years. However, the easing of the Fed's interest rate will increase the pressure of RMB depreciation and capital outflow, so the Central Bank of China will be more cautious about monetary easing and the stock market valuation will be limited.

3, for China, exchange rate adjustment is a short-term risk, and long-term adjustment is conducive to the development of the stock market.

The future exchange rate may still be adjusted, which may still be a short-term risk to the stock market.

On the one hand, since 09 years later, China's economic growth has continued to decline, while money supply is still growing rapidly. On the other hand, since 14 years ago, with the expectation of the Fed raising interest rates, the currencies of both developed and main emerging economies have depreciated against the US dollar, and only the renminbi has appreciated with the US dollar.

Over the past few years, the RMB exchange rate has been temporarily stable as the Federal Reserve raises interest rates and delays the domestic economy.

In the future, if the Federal Reserve starts to raise interest rates again or the domestic economic growth rate will continue downward, the pressure of depreciation will probably rise again, and the stock market will remain a risk in the short term.

But from the experience of other economies, exchange rate depreciation is also a process of returning to a market equilibrium, and also releasing economic risks. After devaluation, domestic assets become relatively cheap, which is conducive to relieving the suppression of asset prices.

So in the long run, the depreciation of exchange rate is conducive to the healthy development of the stock market.

Finally, it should be reminded that exchange rate and stock market are more outcome variables. To judge the trend of the two, the key point is to see changes in monetary policy, real economy and risk preference.