Invite Foreign Capital is the effect of exchange rate movements on stock market performance has been the subject of extensive academic research over the years. Scholars have produced a variety of findings and perspectives on this relationship, which explains why it continues to attract considerable interest. Further exploration of the link between exchange rate changes and stock market behavior remains highly significant for both investors and policymakers. In general, Invite Foreign Capital fluctuations in exchange rates are crucial to examine, as they strongly influence multiple economic variables.

The objective of this study is to analyze how variations in exchange rates influence different capital markets, while also addressing existing gaps in the literature concerning emerging economies. Focusing on the Emerging Seven (E7)—the seven leading emerging economic performers Invite Foreign Capital—offers an opportunity to identify whether their stock markets react similarly to currency fluctuations, and if not, what factors account for the differences. The findings of this research will enrich the literature by clarifying which theoretical perspective better explains the impact of exchange rate shifts on market values. Moreover, conducting the study in emerging markets could provide more revealing insights than in developed economies. This is because, Invite Foreign Capital in advanced countries with mature financial systems and capital markets, the effect of exchange rate fluctuations alone, ceteris paribus, may not significantly alter stock market performance. Hence, this research could help reduce inconsistencies in previous studies.

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The structure of the paper will be as follows: the Invite Foreign Capital next section will outline the theoretical framework, followed by a review of related literature and the formulation of research hypotheses. The methodology section will then describe the data, research techniques, and econometric models used. Section five will present a detailed discussion of the results. The paper will conclude with a summary of findings and recommendations for future studies.

Invite Foreign Capital is one of the primary drivers of exchange rate movements is the relative strength of a nation’s economy, or how strong it is perceived to be. Typically, a robust economy supports a stronger currency, while weaker economies tend to have depreciated currencies. Since a nation’s trade balance plays a vital role in exchange rate determination, countries with persistent trade surpluses are more likely to experience stronger currencies compared to those with trade deficits. More specifically, changes in exchange rates directly affect the foreign exchange transactions of firms, which in turn influence their market valuation. As these exchange rate shifts alter expected future cash flows of corporations, the broader stock market performance of the country is inevitably affected.

This reasoning can lead to two contrasting perspectives. On one hand, an appreciating currency—reflecting a strong economy—may be viewed favorably by investors, thereby attracting greater foreign capital and boosting stock market performance. On the other hand, the reverse can also hold true: a stronger domestic currency may hurt stock market outcomes, especially for exporting companies. This is because an appreciated currency reduces their price competitiveness in international markets, leading to lower revenues and profits, which in turn drive down their stock values. This concept, rooted in the goods market theory, suggests that exchange rate changes alter the competitiveness of exporting firms and thus their share prices (Cakan & Ejara, 2013; Bahmani-Oskooee & Saha, 2015; Lakshmanasamy, 2021).

Conversely, if the production of exported goods depends heavily on imported inputs, a depreciation of the domestic currency may raise production costs, reducing profitability and stock market returns (Jawaid & Ui Haq, 2012). Therefore, the impact of exchange rate movements on stock market performance is likely to differ across nations, depending on whether their economies are more reliant on imports or exports.

Before moving into the research, it is useful to provide a brief overview of the current account balances of the E7 economies. This will help illustrate the trade performance of these nations during the period of 2019–2021 and indicate whether they acted as net importers or exporters. Table 1 outlines the current account balances of all seven countries across these three years. As shown, the majority of E7 members (Mexico, India, China, Indonesia, and Brazil) saw a significant rise in their current account balances in 2020. Mexico and India followed a comparable pattern: both ran deficits in 2019, shifted to surpluses in 2020, and then slipped back into deficits in 2021. In contrast, China and Indonesia maintained upward momentum in their current account balances through 2021. Indonesia, for instance, moved from a $30.28 billion deficit in 2019 to a $3.43 billion surplus in 2021—an improvement of roughly 111.3%. Brazil consistently recorded deficits across all three years, while China and Russia maintained surpluses throughout the period. Turkey, meanwhile, showed a surplus of $5.3 billion in 2019, swung into a sharp $35.54 billion deficit in 2020, and then narrowed this deficit to $13.69 billion in 2021—an overall adjustment of about 358.3% between 2019 and 2021.

Several studies have explored the relationship between exchange rate fluctuations and stock market performance. This section reviews some of these works and their findings. The discussion begins with studies that report a positive influence of exchange rate movements on stock markets, followed by those that identify either a negative relationship or no significant effect.

Moussa and Delhoumi (2021) investigated the impact of exchange rates on the primary stock indices of five MENA countries. Their findings confirmed a long-term link between stock returns and exchange rates. They further showed that stock markets in Tunisia and Egypt were more responsive to exchange rate declines than those in Morocco, Turkey, and Jordan. Overall, the study concluded that a strengthening domestic currency generally boosts stock market returns in the MENA region.

Similarly, Mechri et al. (2018) reached comparable conclusions when analyzing the Tunisian and Turkish markets. Their research revealed a strong positive effect of exchange rates on stock returns in both markets. They also demonstrated that exchange rate volatility significantly affects stock market performance, with evidence of volatility clustering in Tunisia but not in Turkey. In other words, in Tunisia, changes in exchange rate volatility strongly influence stock price fluctuations.

In the case of Singapore, Maysami et al. (2004) assessed the link between macroeconomic indicators and sectoral market indices. Their study revealed a positive association between exchange rates and stock market outcomes. They explained this by noting that a stronger Singaporean dollar helps curb imported inflation, thereby improving company earnings and stock returns. Furthermore, a strong currency attracts more foreign capital, which enhances stock market performance. Supporting this conclusion, Hsing (2011) found that depreciation of Bulgaria’s currency negatively affected the stock market, whereas appreciation had a positive effect.

In Pakistan, Jawaid and Ui Haq (2012) examined the banking sector and found bidirectional causality between exchange rates and stock prices. Their results indicated that exchange rate volatility positively influences stock prices, arguing that investors tend to move away from the uncertain currency market into the more stable stock market. On the other hand, Khan et al. (2012) presented contrasting evidence from Pakistan, where exchange rate movements showed a significantly negative impact on stock returns. They reasoned that foreign investors repatriate their earnings in their home currencies; hence, when the Pakistani rupee appreciates, foreign returns decline, potentially discouraging foreign investment. Meanwhile, Suriani et al. (2015) discovered no significant relationship between exchange rates and stock prices in Pakistan, with both their regression and causality tests confirming independence between the two. This view was reinforced by Hunjra et al. (2014), who also reported that exchange rate changes had no meaningful effect on stock prices in Pakistan.

In line with Khan et al. (2012), Khan (2019) confirmed that exchange rates exert a significant negative influence on stock returns in both the short and long term. His study on the Shenzhen Stock Exchange revealed that appreciation of the Chinese Yuan adversely affects stock returns, whereas depreciation has the opposite effect. In the U.S., Bahmani-Oskooee and Saha (2015) also identified a short-term negative relationship between exchange rates and stock prices, though they did not find evidence of such a link in the long run. Similarly, Aftab et al. (2015, 2021) documented a negative correlation between exchange rate movements and stock returns.

In the Malaysian context, Qing and Kusairi (2019) concluded that a weaker domestic currency supports stronger stock market performance. Their findings further indicated that the real effective exchange rate impacts the stock market in both the short and long run. This outcome is reasonable since Malaysia is an export-oriented economy; a depreciated currency makes its exports more price-competitive, thereby benefiting the stock market.

Mouna and Anis (2017) analyzed non-financial sectors during the global financial crisis across eight countries. Their results revealed that exchange rates had a negative effect on the technology sector in most economies, except Germany, the U.S., and the U.K., where the effect was positive. They also highlighted that exchange rate volatility exerted greater influence on Germany, Greece, China, and the U.K.’s industrial sector compared to other sampled firms.

In Zambia, Sichoongwe (2016) examined the relationship between exchange rate volatility and stock market development. The study confirmed that volatility in exchange rates negatively affects market capitalization. The researcher argued that heightened volatility increases market instability, discouraging investor participation and ultimately weakening the stock market. In contrast, Mlambo et al. (2013) found only a very weak association between exchange rate fluctuations and the Johannesburg Stock Exchange, suggesting that South Africa may be viewed as a relatively stable and secure market for foreign investors.

Agrawal et al. (2010) investigated the link between India’s Nifty index and the Rupee/USD exchange rate. They observed a negative correlation and discovered a unidirectional causality from stock returns to exchange rates. Specifically, higher Nifty returns led to Rupee appreciation. Meanwhile, Cakan and Ejara (2013), who studied twelve emerging markets, found evidence of bidirectional causality in most countries. On the other hand, Lakshmanasamy (2021), analyzing the BSE SENSEX, noted that volatility in returns is more responsive to its own past fluctuations than to exchange rate changes. Therefore, in India’s case, the evidence suggests that stock market movements tend to influence exchange rates more than the reverse.

In Vietnam, Dang et al. (2010) confirmed an asymmetric relationship between exchange rates and stock prices in both short- and long-term horizons. Their study revealed that stock prices respond differently to currency appreciation and depreciation, making it difficult to reach a universal conclusion. Aftab et al. (2021) echoed this view, arguing that no single theory can fully explain the exchange rate–stock market nexus, as the relationship is time-dependent. Additionally, Phylaktis and Ravazzolo (2005) emphasized the role of global markets, particularly the U.S., when analyzing the connection between exchange rates and domestic stock markets.

Taken together, the reviewed literature demonstrates that the impact of exchange rates on stock market performance remains inconsistent and often contradictory across countries and contexts. Accordingly, the following research hypotheses are proposed: