Housing sector is one of the most important sectors of any economy. The recession in US started when the housing sector and the real estate bubble burst in 2006. This started the sub prime mortgage crisis and ultimately to the stock market crash of 2008. So, you can well imagine the importance of housing sector for the financial markets. Now, housing sector is an important sector that impacts the interest rate policy of any central bank. These interest rate changes affect almost all the financial markets including the currency market. High interest rate appreciates the currency and a low interest rate depreciates the currency.
As a forex trader, you should anticipate these interest rate changes. The best way to anticipate interest rate changes is by watching the housing sector. Now, housing sector is a reliable indicator in almost every country that has a floating currency.
A weak housing market portends a decrease in the interest rate by the Central Bank while a strong housing market raises fears of inflation and a likely increase in the interest rate. As a currency trader, you need to keep an eye on the key sources of housing data and develop a focus on key indicators for each currency pair.
Now, you need to know whether the USD (US Dollar) is bullish or bearish. You can form an opinion on the market sentiment about USD by watching the housing equities. Housing equities can give a lot of information about the US housing sector and how it is expected to do in the near future. One of the best known housing market stock is KB Homes. KB Homes is one of the largest single family homes builder in the US. The stock prices of KB Homes can be taken as a leading indicator of the performance of the US Housing Market. If the stock is doing well, you can take it as a sign that the US Housing Market is performing well and if the stock is not doing well, it means that the housing sector is slowing down.
Suppose, you trade GBPUSD pair! In July 2006, an uptrend in GBPUSD pair started that lasted for many months. The currency movement went to historical highs against the US Dollar (USD) and then retraced back at the end of 2007.
What was the main cause of the trend reversal. The major cause has been the fall in the housing prices in UK housing market after a decade long boom that ended around 2007 when the home mortgage crisis reached its peak in the UK housing market. Now, if you had been following this trend, you would have observed that the currency pair GBPUSD followed the slowdown in the UK housing market. Now, you must be thinking housing sector may be important for the US and UK economies only. No, you can use housing market date in Australia to trade AUD (Australian Dollar). If you have been following Bloomberg last year, you must have known why AUD rose. The reason was simple, when the home approval rates surged, AUD appreciated.
Japanese housing market data can be used to trade the Japanese Yen (JPY), one of the important global currency. Similarly, you can trade NZD (New Zealand Dollar), CAD (Canadian Dollar) and other currencies using the housing sector data in those economies as a leading indicator.
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Great post !liked the idea keep it up