In the UK, other indices, for example, Mortgage Approvals, the Halifax House Price Index m/m also play a major part in the fundamental strength of GBP.

Ripple Effect
Unlike the situation a couple of years ago, (when, as always in a bubble, people got a bit silly), home-builders aren’t going to be starting up unless they are fairly confident of the end market and actually selling the units when they’re built.

And it’s not just the construction industry – the ripple effect is all the growth that goes with a new house – household appliances, furnishings all have to be bought, which acts as a multiplier across the wider manufacturing economy – which the markets are going to take notice of… So while commodities such as lumber are maybe most directly affected by Housing data, the ripple effect follows all the way through the economic fundamentals to reach the forex market.

Forex News Indicator
As a news indicator, Housing Starts data are definitely to be kept a close eye on.
In the present circumstances, with volatile markets across the board and the general air of pessimism, for example, Housing Starts figures less disastrous than expected in the forecast will certainly move USD in its pairs – so worth looking out for…

Despite forecasts for a depreciation of the Dollar, many economists are now saying that the negative housing data released from the United States yesterday may actually bolster the USD.

Let’s state the effect in the simplest possible terms.

Bad news for the US economy, lower jobs, lower GDP, leads to lack of confidence
Which leads to a rush towards safe haven currencies…
Which leads to buying USD – because USD is in itself, considered a safe-haven currency…
So bad US news leads to USD going up.

This rush to a safe haven, any safe haven, after every news announcement is creating some weird effects. It flies in the face of logic, well, simple logic anyway – and is a sign of the present dominance of USD

No, I don’t know of any name for this upsidedown, wrong-way-round, echo, reverb effect – but it certainly ought to have a name…

It’s all about safe havens

The USD appears to be the safest investment, as traders are moving en masse to buy into the greenback.

Some people reckon that (if the entry point is right) currencies such as AUD or NZD might turn out to be the better safe havens during the present financial crisis – maybe… CHF has always had a lot to recommend it. And the irony is that while it certainly isn’t borne out with pair prices at their present levels, as a long-term safe haven, the US dollar might not turn out to be that safe a haven after all…

US Dollar dominance
This effect, whatever it’s called, is certainly a sign of the overwhelming domination of the forex trade by the US dollar. From memory, about 85% of the traded volume in the whole forex market, involves the dollar. Structurally, this is always going to bring problems in practice. Excessive dominance? Not for us to say – the situation is as it is, for as long as it stays that way…

If we were serious economists, interested in fundamental analysis for its own sake, the theory of market movements, etc. we probably ought to be worried – but we’re just common, vulgar forex traders, all we do is operate the system for what it is…

But what to call the actual effect? Any ideas?

Please note – I’ve said USD throughout this – not USA, necessarily…

In the different currency zones, governments or (semi)independent organizations publish CPI figures on a monthly and yearly basis – in the US, it’s the Department of Labor, while in the UK, it’s the Office for National Statistics – where it’s called the Retail Prices Index (RPI).

Remember that it’s domestic statistics, for a “typical urban consumer”, whatever that is – the price of food in supermarkets, the average family shopping basket, not industrial costs.

Underlying CPI
Also sometimes known as the core CPI – meaning the index for all items except those classified as food or energy. These tend to be more volatile than others, subject to more significant rises and falls and also seasonal variations. Consequently the underlying CPI will usually be a better index by which to keep track of longer-term trends. Cars, airfares, clothing & apparel can also be relatively volatile items within the underlying CPI.

Forex News CPI
For example – CPI figures for Sweden are coming out tomorrow, and we’re in a phase of generally decreasing inflation, ie deflation, so CPI m/m is forecast to be -0.7%, compared with the previous month’s figure of -1.3%. If the actual figure is different from the forecast, expect movement in the Swedish krona, for example, in the currency pair SEK/EUR.
Remember, it’s a measure of the underlying strength of a national economy and the difference between expected and actual is where the trading takes place – if you’re new to forex trading, look out for sudden movements in currency prices shortly before, and definitely after, CPI news announcements.

With the panic on, they’re all getting liquidity back and any movements are largely a function of who’s got more to clear out and how fast they can do it.

There’s no bank around at the moment who wants to be seen as lacking capital reserves, the spotlight falls on them and that can be self-fulfilling…

Yesterday, the voices became louder – the markets crisis was linked more firmly to coming economic crisis – serious risk of recession etc etc. prolonged slowdown – sales down, business confidence down – they’ve been saying it for while, but the general media and public have been more caught up in the market crisis – in many cases, mistaking the one for the other.

The (maybe unpalatable) fact is that for the average forex trader, no problem, it would at least be a decrease in volatility.