Currency matters

Many traders have noticed the recent, impressive run in European stocks, and specifically the strength in Germany. Take a look at the following chart:

DJ Germany Index
DJ Germany Index

However, as we all know, the US Dollar has been a historic bull run, and a big part of USD strength has been a decline in the euro (which now seems to be eying parity.) German stocks, priced in US Dollars, show quite a different picture:

DJ Germany Index, in USD
DJ Germany Index, in USD

Which is right? Well, I think the short answer is that it depends on your perspective; either is right, but both cannot be right. Generally speaking, I think it makes most sense to look at all markets in one currency. Since I am a US-based trader and analyst, I can see a strong argument for pricing everything in USD, but there are other arguments to be made in different parts of the world.

One thing is clear–I think we need to be very careful of comparing stock indexes priced in different currencies. For instance, a chart of the S&P 500 and the DAX are not comparable, unless you also are considering the currency influence as well, and looking at the S&P 500 / DAX spread with no currency adjustment could be highly misleading. Think deeply, and always try to understand what might be happening behind the patterns we see on charts and in the markets we trade.

 

AdamHGrimes

Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.