The time to be most concerned with an economy is when cyclical risks align with the structural ones. In Canada there is evidence this is happening. The most overt structural risk in Canada is the huge household debt-to-income ratio, significantly bigger than the US’s, without seeing any sort of a correction in at least 30 years (top-left chart). Bank of Canada governor Stephen Poloz noted the risk of Canada’s vast household debt in a recent speech. Overall, the BoC has a dovish stance, highlighting other concerns such as the ratification of CUSMA (the successor to Nafta), a slowdown in the oil sector (we are fairly neutral on the oil price at the moment), and a slowdown in housing.

The central bank is more sanguine on housing, expecting recent rate falls will feed through later this year, but we are more circumspect. Transaction volumes have been falling sharply in the two largest markets of Toronto and Vancouver, and house prices nationally are now falling YoY. Affordability is also very stretched (top-right chart). From a macro perspective, the Canadian yield curve is flashing a warning sign (bottom-right chart). In February we suggested waiting for a short squeeze in the CAD to short, but we would consider shorting it now with a reasonably tight stop (against USD, JPY). The last chart shows we have recently had a buy signal on USDCAD based on trend becoming very compacted, which often precedes decent rallies.


(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception