Housing Cycles and Exchange Rates

Abstract

This paper documents that U.S. housing capital investment is a strong negative predictor of U.S. dollar changes and excess returns over the next six months to five years. Other advanced economies exhibit similar patterns. Moreover, positive housing supply shocks persistently predict lower relative prices of nontradables, higher output growth, and higher macroeconomic volatility. A model with housing investment shows that these channels generate the exchange rate predictability under incomplete and complete markets, respectively. Cross-sectionally, currencies with higher loadings on the U.S. housing cycle carry higher average currency premia, compensating the U.S. investor for bearing the U.S. long-run consumption risk.

Keywords: housing, exchange rate, predictability

JEL Classification: F31, F37, G150, G17