ALSO WATCH HOUSING EQUITY SECTOR STOCKS

Another way for the forex trader to get a grip on housing data is to watch equities that are housing related. For example, Lennar Homes is a leading home builder. Its stock price and earning forecasts offer good clues regarding the direction of the housing market and by inference interest rate policies (Figure 1.3). In April 2006, Lennar homes broke down below its support at $55 per share. Lennar Homes’ weakness was an omen about the end of interest rate increases. Interestingly, when the forex market begins to conjecture whether the Federal Reserve will raise rates in the future, the trader following Lennar Homes’s stock price or another housing equity leader will be helpful in shaping an opinion about the likelihood of an interest rate increase.

A S S II G N M E N T

Find Other Equities that Provide Insight into the Housing Market

In this assignment, the trader should select the top equities that represent aspects of the housing sector and start watching their weekly performance. When these housing equity stocks start probing their weekly support, resistance, and trend lines, the trader will have clues as to a potential change in the housing market.

HOUSING DATA AND GREAT BRITAIN

As discussed earlier, housing provides a strong indicator regarding interest rates throughout the world. For example, as 2006 ended, the situation in Great Britain regarding housing indicated a very strong housing market and therefore supported sentiment of interest rate increases by the Bank of England. In 2006, housing prices inflated by nearly 10 percent in Great Britain. Economist Diana Choyleva believed prices could rise by as much as 15 percent in 2007. But she warned that if the Bank of England did not prevent people’s taking on excessive debt by raising interest rates, it risked laying the foundations of another major collapse. In January 2007, she said, “The Bank could risk finally spawning a house price bubble in 2008” (Edmund Conway, economicseditor, “House Prices at Their Most Overvalued for 15 Years,” Telegraph, January 2, 2007).

In other words, expectations of an interest rate cut in Britain would require evidence of a slowdown in housing price increases. The trader trading the British pound should watch British housing data very carefully and gain an edge in shaping trading strategy. A useful web site for staying on top of British housing data is www.hometrack.co.uk/.

SUMMARY

Tracking changes in how an economy is growing is clearly an important part of gaining a sense of whether a currency will be strengthening or weakening. The relationship of growth and currencies applies throughout the world. While there are many aspects to economic growth, the forex trader’s main focus should be on interest rates. An increase in interest rates tends to strengthen the currency. The trader needs to go further than just knowing what the rate levels are. They trader needs to assess whether the economy is strengthening or weakening. Housing data is one of the most important areas that affectthe decision to increase rates, keep rates the same, or decrease rates. The forex trader should keep track of housing data when trading a currency.