I found a great article explaining the effects of currency movement to stock prices

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the jist:

  1. Recent Currency movement has the opposite effect to stock prices for developed markets in following 3-5 years, i.e. ( US, Europe, Japan). So if USD strengthens braodly against most currencies like it has, then US stocks will initially outperform the world (june 2014-now) then in the following 1-3 years weaken, and vice versa.
  2. Currency movement has the same effect in Emerging markets. For example, So if USD strengthens against the Brazilian Real like it has,  the Bovespa will initially fall ( from 2011-2014) along with the Real, then bottom out and rise before the Real does.(I hope we are there now)
  3. Lower CAPE ratio indicates explain 50-60% of higher future returns, while currency can only explain 10% of that 50-60%. So focusing on value at hand is more important than speculating on the currency movement.

We can see how EM stock markets priced in USD can decline 60-90% from previous all time high, then recover to all time highs again in the following up cycle. Some countries bottom out first, others bottom out 2-3 years later.

The key is recognize when the currency decline might be nearing the end, that’s the art of bottoming fishing which will lead to eye popping returns in the years following the final bottom.