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In the UK, the FTSE100 is achieving record highs at the same time the currency (GBP) is depreciating rapidly.

The media often correlate the two events by reporting that since the indice is made of 100 multinational companies who trade primarily in foreign currencies; a weak pound allows them to book larger profits after they trade back into the GBP domestically.

However, can the FTSE100 decrease at the same time the currency also decreases in value or must the two levers always go in separate directions?

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  • $\begingroup$ The answer is yes, I think. I will formulate the answer soon. $\endgroup$ – 123 Mar 23 '17 at 15:17
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    $\begingroup$ What is an "exporting nation"? If that means a country that exports, then all countries are exporting nations. If that means a country with a positive balance of trade, then the UK is not an "exporting nation", not at least since the late 80's. So I think the title of the question is misleading. $\endgroup$ – luchonacho Mar 24 '17 at 8:21
  • $\begingroup$ I meant a nation whose primary indice is one of exporting goods and services from a UK HQ. Which the FTSE 100 is. $\endgroup$ – Venture2099 Mar 24 '17 at 10:10
  • $\begingroup$ That is not the most straightforward interpretation of "exporting nation". It is clear that the two existing answers did not assume your interpretation either, so the question remains misleading. I still suggest a redefinition of the title, and a clarification of the question. Also, do you have any proof that FTSE100 companies are in the aggregate net exporters? $\endgroup$ – luchonacho Mar 24 '17 at 14:53
  • $\begingroup$ I am not proving anything. I don't need to validate anything. Feel free to completely disprove me or move on. $\endgroup$ – Venture2099 Mar 26 '17 at 14:15
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Your question, as I understand it, is: can a nation's currency and a nation's stock index decline in value simultaneously. The answer is yes and I think the best way to show this is with an actual example:

In 2013, the US raised its interest rates.

enter image description hereThis triggered capital inflows (US) and the analogous capital outflows (emerging market economies).

enter image description here

Clearly, currencies from these emerging market economies devalued relative to the USD. So here is part one of your question. Now the crux - what happened to securities values in those nations?

enter image description here

and here are the resulting Bond/Equity Fund flows:

enter image description here

This is a bit of a broad answer but your question is a subset of what is contained herein. Yes, the FTSE can decline while the currency decreases in value.

Edit: To be explicit, I am omitting an overview of theoretical mechanism because I think BB King's answer suffices if one is interested in theory. If one is instead is instead compelled by empirical evidence, I think this answer suffices. Both responses combine into a very solid answer, I think.

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  • $\begingroup$ The answer reflects the inconsistency between the title of the question ("exporting nation") and the content of the question ("exporting firms inside nation's stock index"). You are further assuming that the countries in your list are (net) exporting nations. Not all of them are. For example, in the period you show, only 5 out of 12 countries were net exporters. These were not: Indonesia, Phillipines, Mexico, Turkey, Thailand, South Africa, and India. Given this, I don't see how this actually answers the question. $\endgroup$ – luchonacho Mar 30 '17 at 8:43
  • $\begingroup$ Feel free to write your own answer. $\endgroup$ – Venture2099 Mar 31 '17 at 17:46
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Yes, the FTSE 100 can decrease at the same time as the currency. It depends on what is causing the depreciation of the currency or what is affecting the FTSE at the time. It is hard to establish which way the effects are going in real time, however.

Suppose the currency is depreciating due to loose monetary policy. If the Marshall-Lerner condition is fulfilled, this means companies will export more and have more profit. In that case, we could expect the FTSE to go up. On the other hand, if the condition is not fulfilled, exports may actually go down and the FTSE with it. This is the case where the currency depreciation affects the FTSE.

On the other hand, the FTSE may affect the currency. If firms are facing a crisis or other problems, the FTSE goes down. This may prompt the central bank to attempt to depreciate the currency or it may prompt investments to flow out of the country, which depreciates the currency. The currency may depreciate for a while, before the monetary policy has any positive effects on the FTSE. The loss of investment will have a direct negative effect on the FTSE, as there is less capital supply and interest rates for firms may go up. Here again both the FTSE and the currency may go down.

There could also be third factors that affect both the FTSE and the currency. Suppose the currency is depreciating because of other factors, e.g. an increase in uncertainty. This may cause investments to flow out of the U.K. thereby depreciating the currency. Further, that same economic uncertainty and reduction of investment could hurt profits and therefore the FTSE could go down.

Moreover, a simultaneous crisis in the banking industry and a currency crisis is very possible. These are called "twin crises". See the 1999 Kaminsky and Reinhart paper in the AER for a reference. In that case, the FTSE and the currency can go down simultaneously. Twin crises are more relevant for fixed exchange rate regimes, however, so this possibility may not apply to the U.K. as much as to other countries.

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