Housing data is one of the most important components of projecting currency moves and in anticipating a change in the interest rate policies. Interest rate changes affect the currency pairs drastically. Rather, whatever market you trade, interest rate plays a pivotal role in all financial markets. Interest rate increase always appreciates a currency while an interest rate decrease causes depreciation.
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.
Housing sector is linked with dozens of other sectors in the economy. When the housing sector slows down, it tends to slow down the other sectors as well. This general slow down of the economy forces the central bank to lower the interest rates to encourage more economic activity. In the same way, when the housing sector overheats, it causes inflation in the economy. Central banks have a mandate to control inflation. They are forced to increase the interest rates. Thus by looking at the housing sector data, you can easily form a picture about the expected interest rate changes in the economy. Interest rates are very important for the currency market. If you can anticipate interest rate change before time, you can make a lot of winning trades.
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.
The cause was the fall in housing prices after a decade long boom. The direction of GBPUSD pair followed a significant slowdown in housing prices and mortgage approvals in Britain. Now you can use housing data in trading Australian Dollar (AUD) as well. This statement by Bloomberg can give you an indication that how important housing sector can be for AUD: "AUD rose, reversing a loss, after a government report showed home building approvals unexpectedly surged in November by the most in the nine months.
Similarly, if you trade Japanese Yen (JPY), you will find the Japanese housing data as an important factor in forming expectations about the Japanese economy. Similarly no matter what currency pair you trade whether it is New Zealand Dollar (NZD) or Canadian Dollar (CAD), housing start data is leading indicator of whether the economy is declining, stalling or growing.
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