Trading the News: U.S. Housing Starts

What’s Expected
Time of release: 09/17/2008 12:30 GMT, 08:30 ET
Primary Pair Impact : EURUSD
Expected: 950K
Previous: 965K

How To Trade This Event Risk

The downturn in the U.S. housing market has clearly taken a toll on the economy, and conditions may only get worse as economists anticipate housing starts to fall to 950,000 from 965,000 in July. Mounting inventories of unsold homes have led home values to falter, with pending home sales sliding to -3.2% from 5.8% in June. Meanwhile, mortgage delinquencies have surged to a fresh record high of 6.41% from 6.35% in the first quarter, which suggests that the housing sector may weaken further. Furthermore, the unemployment rate spiked to 6.1% from 5.7% in July, and may rise further as businesses continue to cutback on employment. Stagnant labor demands strengthens the argument that growth prospects will deteriorate over the second half of the year, which will only prolong the slump in the U.S. economy. The repercussion effects of the housing meltdown has led Lehman Brothers to file for bankruptcy over the weekend, with AIG coming out as the latest casualty, as the insurance giant scrambled to raise cash yesterday. However, the instability and uncertainties surround the financial sector could mute price action for the housing release as the market is on high alert for any further developments for Lehman and AIG. Also, with the FOMC rate decision on tap, market sentiment could shift dramatically if the central bank does in fact deliver a rate cut to alleviate market turmoil.

Typically, housing starts has not been able to driven price action in the past, but with mortgage applications and existing home sales on the rise, an improvement in construction could provide dollar support. Accordingly, we would look for housing starts bounce back above the 1 million mark with a focus on single home construction, and will look for a supportive increase in building permits for a long dollar position (Short EURUSD). If the fundamental release falls in line with our expectations, we will look for a red, five-minute candle to confirm an entry on two lots of the EURUSD. Our initial stop will be set at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based purely on our discretion, and we will move the stop on the second lot once the first half of the trade reaches its target in order to preserve our profits.

Conversely, a drop in home construction would signal that economic activity will remain subdued for the second half of the year, and could weigh on the dollar. As a result, if the release falls inline or lower than that the expected print in housing starts and building permits will trigger a short dollar position(Long EURUSD), and we will follow the same strategy as the long dollar position, just in reverse.

Jamie Saettele is a Technical Currency Analyst for FXCM.