Impact Of Housing Data On Forex Trading
Do you remember the housing market crash in 2007 and the financial crisis that followed in 2008?? Like myself, you may have been too young to understand what was going on.
BUT those who worked for Lehman Brothers, and other major banks, will never forget it. Lots of them lost their jobs and more banks than ever before either filed for bankruptcy or were sued millions of US Dollars.
All of this was caused by the crash of the housing market. The details of how that occurred we won’t cover in this article, but we will discuss what Forex traders actually care about – The importance of the housing market and the effect on trading.
What does the housing market reflect?
1. The strength of a country’s economy
How you may ask? Well simply put when consumers are taking out mortgages to purchase homes, this means they should have a good credit score (because you should only be granted a mortgage if you can afford it)
The credit score is used by banks as a method to validate that a consumer should not default on the loan provided by the bank.
If more people are purchasing homes this means that employees are being paid good wages and that job data is strong, this indicates a strong economy.
2. Provides a gauge of investor confidence
More homes are built meaning there is greater infrastructure development in the country. By extension, more jobs are created and money circulation increases!
Because a strong housing market means a stronger economy, we can deduce that the housing data has an immense influence on the countries currency.
What are the effects?
When the housing market is weak
Let us think about what happens when housing markets are weak and the overall data is poor and why this happens in the first place.
This is a sign of weakness and instability in a country and a lack of economic empowerment or financial development as we previously spoke about in the article on the FOMC. WHY?? Because the government is not doing enough to boost the economy or what is known as economic activity.
The currency weakens – Internally it means interest rates change, probably forcing a decrease to spur spending and investment. This decreases the value of all investments held in the currency.
Externally it affects trade and buying power because the weakened currency makes imports more expensive. Because the country cannot afford what it could previously, it is impossible to strike a balance between the imports and exports on the trade balance.
When the housing market is strong
Let us now look at what happens when the numbers are reversed!
With more people buying homes the GDP of a country can increase, this increase allows for more investments to enter the country. Why? Because investors look for the promise land! Returns, returns, and more returns are what they are after!
How Forex traders can take advantage of this?
With the central banks looking to maintain growth when the housing market is doing well, we as Forex traders should be looking to capitalize on the upward momentum for the short or long term, depending on your trading strategy.
On the other hand, when Central Banks decide to cut rates (due to a badly performing housing market) investors are deterred and so we look for significant weakness in the currency and ride it to the bottom.
At the end of the day, we look for optimism or pessimism and then join the party.
Final note – Understand the numbers and watch for key pointers like Central Bank fundamentals. Furthermore, look at how the housing markets perform in your own country for a more in-depth understanding.
Happy trading traders!
Trade smart, not often!