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.
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As a currency trader, you should always keep an eye on the expected interest rate changes. One of the best and the easiest ways for you to know about a expected interest rate change is by monitoring the housing sector data. Housing sector data can be taken as a leading indicator for the the expected interest rate change in the economy. Now, this doesn't work in only US economy but rather works in all those economies that has a flexible currency rate regime. Any economy that has a well developed housing sector will be impacted by it slow down. Periodical release of the housing sector data can be used as a leading indicator of interest rates in the economy.
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.
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For forming your market sentiment about US Dollar, you can keep watch on housing equities. Housing equities can give you an important clue about the prevailing trend in the US housing sector. Now KB Homes is a leading indicator of single family homes in US. KB Homes stock price can be taken as a leading indicator of the strength or weakness of the US housing market.
Take the case of British Pound and the US Dollar GBPUSD. A strong uptrend in GBPUSD currency pair started in July 2006 that lasted for many many months. This uptrend went to historical highs, reached it's peak in 2007 and after that a retracement started.
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.
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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