Home Advanced Forex Education Forex Fundamental Analysis What Impact Do ‘Building Permits’ News Release Have On The Forex Market?

What Impact Do ‘Building Permits’ News Release Have On The Forex Market?

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Introduction

The building permits monthly reports is one of the major indicators closely watched by economists and Fundamental analysts. It is also one of the most misunderstood numbers even by experienced traders. Understanding the difference between building permits report, housing starts report, and housing completion reports and what they imply is key here. It is important to understand the building permits report because it plays a key role in predicting GDP growth.

What is a Building Permits Report?

Building Permit Report

It is an official authorization by the local governing body to allow construction of a new building or the reconstruction of an old one. An individual owning land cannot simply build a house or a commercial store without any approval from the concerned legal authorities. The building which has obtained its permit implies that it has received the planning permission by the local state planning department.

The governing body dictates construction rules and regulations, which will be specific to that geographical location. For example, a state which is vulnerable to earthquakes is likely to have a mandate which dictates that building should be able to tolerate a certain level of seismic activity. A coastal region-building permit might require the builders to construct the building to tolerate high-velocity winds etc.

Housing Starts Report

It is a monthly report which tells the number of houses that have started their construction activity recently and are at the beginning stage of the construction process.

Housing Completion Report

It is also a monthly report which tells the number of houses that have reached their finishing stage with the majority of the construction work completed recently.

How is the Building Permits Report obtained?

In the United States, the United States Housing Sector monitors building permits. The Housing Sector releases the U.S. Housing Starts report from which the United States Census Bureau releases the monthly building permits report. The report is released every month in the second or third week for the previous month (eighteenth working day to be precise).

As per the Census Bureau, the organization conducts a voluntary mail survey, to which the officials give a response with their reports and figures from which they generate the final report. They cover almost the entire country through the individual permit offices, which in most cases, are the municipalities. Based on geographical locations, the reports can be categorized for area-specific analysis. 

Is the Building Permits Report important?

The number of building permits applied is genuine, as it costs around 500 to 2000 dollars on the type of building, which can be a residential home or a commercial store. All the numbers are, in actuality, going to translate into real newly constructed buildings.

Construction of a building involves a lot of economic activities like the hiring of the labor force, preparing raw materials, purchasing construction items, hiring engineers, etc. Because of the scale and nature of the activity, more money gets circulated into the economy. A large increase in the number of building permits can indicate an increase in employment, increased consumption of goods and services, flourishing businesses, etc.

Construction permits also indicate that the population has enough funds or has the necessary means, which is usually bank loans. Most people construct a home through a mortgage, which implies that banks are ready to lend money; this again implies that money was injected into the economy to stimulate economic activity.

An increase in building permits can also mean that the population has more confidence in their economic prospects and trust the solvency of the plan. Since the construction of a home or a commercial store involves a significant amount of money, we can also give an insight into the nation’s liquidity and health of the economy. An increase in building permits also gives us an idea about the country’s lending environment, i.e., whether the health of the banking sector for the monetary base of the nation will expand or contract, which can be inflationary or deflationary respectively.

How can the Building Permits be Used for Analysis?

The data set goes back to the 1960s, which is a fairly decent range to rely on its correlation with economic activity with good confidence. The U.S. Census Bureau publishes building permits report, housing starts report, and housing completion report. Among these, the building permits report is the most closely watched reports as it indicates an upcoming economic activity. Whereas the housing starts report tells us about the current economic activity, while the housing completion report tells us of the past economic activity.

An increase in the building permit report tells that the construction sector people are confident about an increase in demand for house sales, which implies more money will be in circulation soon. Conversely, decreased building permits report tells us that the economy is slowing down or contracting due to which people are not ready to buy new houses or do not have sufficient funds to afford the cost.

The building permits report is an advanced indicator, whereas the housing starts report is a current indicator, and the housing completion report is a trailing indicator. The building permit indicates first of an upcoming economic surge or plunge while the housing starts report reflects the current economic condition, and the housing completion report shows the effect of a past economic surge or plunge.

It is noteworthy to mention that the housing completion follows the housing starts numbers, and the housing starts number follow the building permits numbers. An increase in the building permits will automatically result in a rise in the housing starts number in the subsequent months, and a few more months later, the same numbers will appear in the housing completion report. Hence, understanding which reports implies what economic activity is key here.

Sources of Building Permits Reports

We can browse through the historical building permits survey reports on the official website of the United States Census Bureau here. You can also find the construction-related statistics here.

Impact of Building Permits news release on the price chart 

In the first part of the article, we understood the importance of Building Permits in a country, which is a key indicator of demand in the housing market. The ‘Building Permits’ indicator, also known as ‘Building Approvals’, is one of the most impactful events in the forex market.

Traders and investors around the world pay a lot of attention to this data and keep close on its numbers. The ‘Building permits’ data is released on a monthly basis and is said to cause a fair amount of volatility in the currency pair. In the following section, we shall see how the data of ‘Building Permits’ affects the price charts and notice the change in volatility.

For illustrating the impact of the news, we will be analyzing the latest month-on-month ‘Building Permits’ data on Australia and measure the impact of the same. A higher than expected reading is considered to be positive for the economy, while a lower than expected reading is considered to be negative. In this case, the ‘Building Permits’ of Australia was reduced to -15.3% from +3.9%, which is a reduction of a whopping 19.2%. One would already imagine this to be very bad for the Australian economy but let us see what it meant for currency traders.

AUD/CAD | Before The Announcement

We shall begin with the AUD/CAD currency pair, where the above chart shows market action before the news announcement. We see a decrease in volatility as the announcement is nearing as the market players are eagerly waiting for the ‘Building Permits’ data. We already have an idea from what is forecasted by economists that the data is going to much worse than before due to a fundamental factor that has affected the Australian economy. Instead of predicting what the numbers are going to be, it is better to wait for the actual news release and trade based on the shift in momentum.

AUD/CAD | After The Announcement

In the above chart, after ‘Building Permits’ data is released, the market collapses, and the price goes below the moving average. The market reaction was as expected, where there was a sudden increase in volatility on the downside. The data shows that there was the least confidence in the housing market of Australia in the month of February. As the market falls and given that the ‘Building Permits’ data was very bad, we can ‘short’ the currency pair with certainty.

A few hours later, we see that the market shot up and reversed completely.  This move was influenced by the announcement of ‘Interest Rate’ by the Reserve Bank. We need to always be aware of such events, especially when we are already in a trade. This teaches us the importance of trade management, which crucial for every trade.

AUD/CHF | Before The Announcement

AUD/CHF | After The Announcement

The above images represent the AUD/CHF currency pair, where it seems like the market has factored in weak ‘Building Permits’ data before the news announcement. After a big downward move, the market has retraced from the ‘lows,’ which is the ideal use case for going ‘short.’

Also, at present, the price is below the moving average, which shows the weakness of the Australian dollar. After the data is released, the price goes lower but leaves a spike on the bottom, and we see increased volatility on both sides. But this shouldn’t scare us, and we need to stick to our plan of going ‘short’ in the currency pair as the data was really bad.

EUR/AUD | Before The Announcement

EUR/AUD | After The Announcement

In the EUR/AUD currency pair, the Australian dollar is on the right-hand side, which means a news release positive for the currency should take the price lower and vice versa. The characteristics of this pair are different from the above-discussed pairs since the price has retraced the major uptrend by a lot. This means the Australian dollar is very strong against the Euro.

Therefore, any news release that is negative for the Australian economy may not collapse the Australian dollar here. Therefore, it needs to be traded with caution. After the news announcement, the price does go up because of the weak ‘Building Permits’ data, but after a couple of candles, the price goes below the ‘news candle.’ We see that the news data does not have much impact on this currency pair and not suitable for trading based on news.

That’s about Building Permits and the impact of its new release on the price charts. Let us know if you have any questions in the comments below. Cheers.

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