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EUR/USD: Trading the U.S. Housing Starts Report

Wed, Feb 18 2009, 06:06 GMT
by Daily FX Research Team

DailyFX

Housing starts in the U.S. are expected to fall to an annual pace of 530K from 550K in December, which would be the lowest reading since recordkeeping began in 1959, and conditions are likely to get worse as home values continue to tumble lower.

Trading the News: U.S. Housing Starts

What’s Expected

Time of release: 02/18/2009 13:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: 530K

Previous: 550K

Effect the Housing Starts report had over EURUSD for the past 2 months

December 2008 U.S. Housing Starts

Housing starts in the U.S. fell 16% in December, which pushed the annual rate to a record low of 550K from a revised reading of 651K in the previous month, and conditions are likely to get worse as home values continue to fall lower. A deeper look at the report showed that construction of single-family homes fell another 13.5% during the month after dropping 14.2% in November, while starts for multi-family homes plunged 20.4% following the 17.3% decline in the previous month. The data continues to foreshadow a deepening recession in the economy as housing conditions remain far from normal, and the outlook for growth remains bleak despite the extraordinary efforts taken on by policy makers. As a result, the Obama administration is widely expected to push for additional government aide to mitigate the downside risks for growth, which should help to soften the landing of the economy.

November 2008 U.S. Housing Starts

U.S. housing starts dropped 18.9% in November to an annual rate of 625K, which is the lowest level since comparable records began in 1959. The breakdown of the report showed that starts for single-family homes dropped 16.9% during the month to a record-low of 441K, while construction of multi-family homes slipped 23.3% from October to an annual pace of 184K. As falling home prices paired with tightening credit conditions continues to weigh on the world’s largest economy, the FOMC is widely expected to lower the benchmark interest rate by 50bp to a record low of 0.50% in an effort to steer the economy out of a recession, and are likely to adopt additional measures to stem the downside risks for growth as the U.S. faces its longest economic downturn in over a quarter-century.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

Housing starts in the U.S. are expected to fall to an annual pace of 530K from 550K in December, which would be the lowest reading since recordkeeping began in 1959, and conditions are likely to get worse as home values continue to tumble lower. The S&P/Case-Shiller home price indicator showed a record drop in property values as the index slipped 18.2% in November, which was the biggest decline since 2001, and the housing market is likely to weaken further over this year as the International Monetary Fund forecasts the world’s largest economy to contract 1.6% in 2009. Nevertheless, the advanced GDP reading for the U.S. showed that the economy grew at its slowest pace since 1982 as the annual rate of growth fell to -3.8% from -0.5% in the third quarter, which was followed by a 3.5% drop in personal consumption, and the outlook for future growth remains bleak as consumers continue to face a weakening labor market paired with financial uncertainties.
Mounting turmoil across the financial spectrum continued to weigh on private-sector lending as consumer credit slipped another $6.6B in December to $2.56T, after falling $11.0B in the previous month, which was the biggest drop since 1943, while a separate report by the Conference Board showed that consumer confidence fell to a record low reading of 37.7 from a revised reading of 38.6 in December, and the lack of recovery in the housing and banking sector will continue to drag on households as the rate of foreclosures rise at a record pace.
Meanwhile, as President Barack Obama is scheduled to sign the $787B stimulus package later today and plans to unveil a new proposal to mitigate foreclosures, efforts by the administration should certainly help to taper the downside risks for growth, but as economic activity deteriorate further, demands for housing and construction of new homes are likely to remain subdued as a credit conditions tighten. Despite the dour outlook for the U.S. economy, as risk trends continues to drive price action in the foreign exchange market, the greenback may turn a blind eye to its own fundamentals as the reserve currency continues to benefit from safe-haven flows.

Trading the given event risk clearly favors a bearish dollar trade as market participants expect the housing market to weaken further, but an unexpected rebound in home construction could help to raise the growth outlook for the region, which would set the stage for a short euro-dollar trade. Therefore, if housing starts rise above 550K in January, we will look for red, five-minute candle following the event to confirm a sell entry on two lots of EURUSD, and once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance) and this risk will determine our first target.

On the other hand, mounting turmoil in the banking sector paired with deteriorating fundamentals is likely to weigh on households, and as signs of a deepening recession emerge, the U.S. dollar may pare gains as the outlook for future growth deteriorates. As a result, if housing starts falls in-line with expectations or slips below 530K, we will look to short the greenback, and will follow the same setup for a long position as the short trade listed above, just in reverse.

Published on  Wed, Feb 18 2009, 06:11 GMT