HOUSING DATA AS A LEADING INDICATOR

What is important to realize about fundamental analysis of housing sector data is that the
trader can identify pending changes in trends and direction of the economy. Of course, it
is true that forex prices move all the time in reaction to news and the like, but economies
don’t change direction overnight. By understanding housing data, one can develop a fundamental
viewpoint that leads to trading strategies before technical price patterns reflect
the change.
For example, in Table 1.1 we see data on U.S. new housing starts. The year 2005 was
a year of a high level of housing starts peaking in February at 2.2 million units and then
testing that peak in January 2006 (see Figure 1.2). After January 2006, the data showed
a decline, and by August 2006, the decline in housing starts reached levels of 2003. The
forex trader may not have picked the start of the slump by looking at this kind of data, but
clearly would have seen that right after the start of 2006 new home starts were in a period
of weakening. When housing starts reached a peak and then started declining, it was
difficult to be pro-dollar. Although housing data showed a slump, the Federal Reserve
didn’t stop the increase in rates until August 2006. In this case the new housing start data
was a very reliable leading indicator that interest rates would not increase.


By ABE COFNAS