If you have been looking for forex trading tips, the strategists at Bank of America Merrill Lynch have an idea for you: watch stocks.
"We have long been advocates of using equities as signals for trading FX," they wrote in a note to clients. The concept is that when a stock index like the Nikkei or the FTSE 100 is rising, it's a good time to go long the British pound or the yen, respectively, since "outperforming equities attract higher inflows," and "these portfolio flows then provide support for the currency."
The BofA strategists point to long-term success with this approach - but the lately, the markets have not been cooperating.
Countries desperate to weaken their currencies are planning or implementing new stimulus measures, and while that excites stock investors and sends equities higher, it's also weakening their currency. A weaker pound trade-weighted index has supported a FTSE 100 rise. And so far this year in Japan, "the 20% weakening of the JPY has supported the 30% appreciation the Nikkei 225," the strategists say.
The good news for forex investors is that the strategists say a return to normal patterns is imminent. "Following the G7 and G20 meetings, G10 countries in particular are unlikely to actively/verbally coerce currency movement in the future," they say.
At the same time, some of the momentum driving stimulus hopes is slowing. For example, in Shinzo Abe Japan now has the stimulus-minded prime minister investors had wanted, and they are expecting an equally dovish finance minister.
Stock indexes have already started providing better indications of forex returns, the BofA strategists say - so start watching.