The Impact of Exchange Rate Fluctuations on the Stock Market Performance Evidence from Egypt

Abstract

The influences of the macroeconomic variables on the stock market performance have been the core center of the theoretical and empirical investigations. Capital movements have made the macroeconomic variables specifically the exchange rates one of the fundamental determinants of the stock performance. The relationship between the macroeconomic variables and the stock market performance would have an implication on the economic policies and the capital budget, since any negative economic shocks will be reflected on the stock market return. It will also help public authorities to build successful strategies and take the right decisions towards their monetary policy. This study attempted to investigate the impact of exchange rate fluctuations, interest rate and inflation rate, examples of the macro economic variables, on the stock market performance in Egypt. This study applied time series data. The sample of this study was monthly data from February 2012 to December 2017. This period was selected specifically to cover the floatation of the Egyptian pound period. The study selected independent variable (exchange rate fluctuations) and moderating variables (interest rates and inflation rates); the most common factors affecting the stock market performance in previous literature. The dependent variable was the Egyptian stock market performance, where EGX30 monthly return was taken as a proxy for it.It was concluded that there is a direct significant relationship between exchange rate fluctuations and the Egyptian stock market performance, while there was a weak direct relationship between interest rate and Egyptian stock market performance. On the other hand, there was a negative relationship between inflation rate and the Egyptian stock market performance. Based on the conclusion of this study, the government should manage exchange rates which will be safeguard for the performance of the Egyptian stock market. Key words: Exchange rate, Fluctuations, stock market, performance, interest rate, inflation rate, Egyptian stock market, Flotation, EGX 30, Exchange rate regime.