The state of the construction industry is one of the essential indicators of the county’s economic backdrop that indirectly impacts the exchange rate. We should stress the following indicators that show the situation in all countries: construction permits, new residential sales, and construction cost index.
In this article, we delve into how to interpret that data correctly, taking into account their impact on the market.
1. Construction Permits
2. New Residential Sales
3. Construction Costs
4. How to Trade Using Economic Indicators for the Construction Industry
This indicator is usually released in the USA, Canada, European countries, New Zealand, Australia, etc. It measures the number of permits that have been granted for the new residential projects.
A novice trader often puzzles over the following question, “How to use the construction permit indicator, how to trade and what should be taken into account.” First of all, it’s important to understand that the construction industry is interlinked with other economic indicators and factors.
Here are the key ones:
- Interest rate level. The construction industry is powered by bank lending. This means that lower refinancing rates allow companies to borrow at lower interests.
- Personal income. Rising income levels and consumer confidence about the future drive up demand for real estate, so the number of new residential projects increases.
- Seasonality. The activity of the construction industry is subject to fluctuations and depends on the season.
Consequently, if the construction permit indicator grows, this means that the economic backdrop improves, thus having a positive impact on the national currency. However, the interaction is indirect in this case, while the volatility won’t increase much when the statistics are published.
You can use the economic calendar to track the data on US construction permits during the third week of the month.
New Residential Sales
This is another construction sector indicator that reflects the number of homes sold or put up for sale per family. It usually grows when the interest rate on loans secured on real estate increases.
As with the previous indicator, this indicator is seasonal and depends on the dynamics of refinancing rates as well. As a rule, it’s released at the beginning of the month and has a limited impact on the exchange rate.
However, when the dynamics of new residential sales is upward, along with other favorable factors that support the market, we can infer that the economy is growing.
Rising construction costs are another economic growth indicator. As with the first two indicators, it depends on whether the central bank’s interest rates go up or down. The higher demand for real estate and the cheaper construction loans—at low refinancing rates—improve the dynamics of construction costs.
This indicator must be reviewed in conjunction with the first two in order to find out how the construction industry will fundamentally impact the exchange rate.
When the data is published (in the USA, this usually happens on the first business day of the month), the US dollar may not react well to the statistics. However, the market players take into account the indicator’s dynamics together with other economic data.
How to Trade Using Economic Indicators for the Construction Industry
We’ve already established that the construction industry is closely interconnected with the strand of the central bank’s monetary policy and also depends on the dynamics of personal incomes.
However, these findings aren’t the primary indicators of the fundamental analysis, such as GDP dynamics, labor market conditions, inflation rates, and retail sales. Therefore, their impact on the exchange rate at the instant, as a rule, turns out to be restrained.
Meanwhile, these indicators should be factored in when doing the regular fundamental analysis of the country’s economic backdrop.
- Rising indicators for the construction industry demonstrate that the lioliulation has money to buy real estate, which creates demand.
- A surge in demand for real estate liroves that the economy recovers or grows, which has a liositive imliact on the exchange rate.
- &nbsli;Low-interest rates during the economic recovery after the crisis also suliliort the construction industry: loans are lirovided at a lower interest rate.
- In the real estate industry, liositive dynamics are observed when the labor market is uli to scratch: if the unemliloyment rate drolis and the number of jobs grows, the lioliulation has money, demand for real estate increases, etc. (back to Steli 1).
Last but not least, the construction industry should be analyzed as a whole, while using the data output to trade the news is unlikely to work because of their low impact on volatility at the instant.
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