By Sean Hyman As many of you know, the foreign currency market is my domain. I’ve been a professional Forex trader and instructor for years, so everything I do in the financial markets revolves around foreign currencies in some way.

But the truth is even if I quit Forex trading cold turkey tomorrow and never placed another Forex trade again, I would still pay attention to the currency markets. And it’s not because I happen to love currencies.

It’s because just watching the foreign currency markets boosts my stock returns.

Not many retail investors know this, but studying the foreign currency market is one of the easiest ways to gain an edge in your stock investing.

By tracking which currencies are appreciating and depreciating around the world, you can tell exactly where global capital is flowing. When a currency is going up, it’s because money is flowing into it. When a currency is going down, it’s because money is leaving it.

When money is leaving it, all you have to do is look to see where global capital seems to be heading and you can bet that country’s stock market is about to profit.

Let me give you a visual below and you’ll see what I mean.

Money Travels from the U.S. to the Land Down Under

As you’ll see from the visual above, money is currently leaving the U.S. and other countries too, like Japan. Right now, that cash seems to be headed down under to Australia if you look at the appreciation in the Aussie dollar’s price.

I can also verify this by looking to the AUD/USD pair. As it goes up, money is leaving the U.S. and heading to Australia.

You see, the currency is the “door” or entrance into a country. Before you invest in a country’s stocks, bonds, real estate, etc. you have to FIRST convert your investment funds into “their money”.

Want to see another great visual? Here’s a chart that shows Australian stocks vs. U.S. stocks. When the red line climbs, it means Aussie stocks are gaining the upper hand over U.S. stocks. When it goes down, the U.S. stocks are gaining ground on the Aussie stocks. Also, there is a line chart that shows the AUD/USD currency pair too. Check it all out below.

The Aussie Dollar Closely Tracks Aussie Stocks

Australia’s stocks have been gaining on U.S. stocks ever since last February to March. Notice the Aussie dollar started rising vs. the U.S. dollar (line chart)…around the same time!

Notice how closely the two track each other.

Don’t Know Enough about Foreign Countries to Buy? Watch Currencies

Even if you didn’t know anything about Australia’s fundamentals, you could look at the major currency pairs to see where the money was flowing and pinpoint Australia. That would tell you where you’d find the biggest edge and overall technical strength.

The savvy currency trader, of course, knows that Australia has a positive GDP, while the U.S. doesn’t. Currency traders also know that Australia actually has some inflation while the U.S. still has deflation.

They know that Australia has a lower unemployment rate than the U.S. does. They know that China is recovering and buying many of its goods from Australia and not the U.S. So that’s why the AUD/USD is going up over time.

However, even if a stock investor didn’t know anything about the foreign market, they could still tell money is flowing into that country (Australia) more than the U.S. just by looking at the AUD/USD currency pair’s price. Therefore the stock investor would know that the Aussie stock market is about to get a boost from these global capital flows.

In fact, the U.S. stock investor will likely make gains in two ways: through the Aussie stock appreciation AND on the gains from the Aussie dollar. You would make extra money on the currency appreciation when you convert their Aussie profits back into U.S. dollars.

Bottom line: Whether you’re into bonds, stocks, currencies, real estate investments, etc. the currency market tips you off to where the money is flowing. The currency market is the “gate” that it has to go through before going into ANY of these other investments… and it’s the ultimate cheat sheet when you want to see where money is flowing next.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. This is really just the beginning of what currencies can do for your overall portfolio. My colleagues in the Currency Capitalist are constantly uncovering ways to boost your overall stock returns with key currency strategies in foreign bonds, CDs and more. Click here to get a look at their overall strategy.