In late February, I wrote "A Weakening Canadian Economy Needs A Weaker Currency." The Canadian GDP estimate that was released shortly thereafter came in around expectations at 0.6% month-over-month growth and 0.8% year-over-year growth. The market's relief can be seen in the U.S. dollar versus the Canadian dollar. The USD/CAD currency pair peaked exactly on that day and slowly but surely sank from there - even breaking below its 50-day moving average (DMA). During this time and through last week, the U.S. dollar had also weakened against the Australian dollar, traded roughly flat against the British pound and Japanese yen and rallied against the euro, so I believe USD/CAD's decline is likely U.S.-Canada specific.
This decline in USD/CAD abruptly ended today with a very poor Canadian employment report that was well below expectations. The unemployment rate ticked up from 7.0 to 7.2% as the economy shed 54,500 jobs whereas consensus expected an additional 6,500 jobs. The U.S. employment report was little better, but expectations remain higher for the Canadian economy. At the time of writing, USD/CAD is fading back to the 50DMA which now happens to converge with the 20DMA.
The U.S. dollar surges against the Canadian dollar but the recent downtrend is not yet broken
This overall pullback strikes me as a decent opportunity to reload on USD/CAD longs. The poor employment report brings Canadian real estate back in focus. Any further weakening in the labor market will only add to the growing nervousness amongst Canadians about their still robust housing market.
The pricing data below show that Canada has still managed to avoid a major correction of prices in its housing market. While U.S. housing prices peaked 2005 - 2006 and started to collapse in 2007, Canadian housing prices kept on soaring until May, 2008. The subsequent decline did not even last a year, hitting a trough at 8 to 9% declines before resuming the climb and a complete recovery in two more years.
Canada Home Price Index (Jan 2005 to Feb 2013)
Source: MLS Housing Price Index from the Canadian Real Estate Association
According to a recent Royal Bank of Canada (RY) survey, the housing market's levitation is starting to unnerve some people. I can only assume that Canadians are prone to wariness about their good housing fortune given what they witnessed south of the border. This reluctance to fall into the spell of euphoria is probably what helps keep the market as robust as it is. Here is some of what the RY survey found in the attitudes of Canadians (these are all direct quotes from the press release):
- 15 per cent likely to buy in the next two years, down from 27 per cent last year. The 12-percentage-point drop is the biggest year-over-year fall in overall buying intention as tracked by this annual poll.
- Just over half of Canadians think that now is the time to get into the housing market (52 per cent), while fewer Canadians believe house prices will be higher at this time next year (43 per cent, down from 47 per cent in 2012).
- More Canadians in 2013 feel that the current housing market is in balance (40 per cent, up from 36 per cent last year).
The poll also lists some reasons Canadians gave for staying out of the housing market. Taken together, they are relatively inconclusive with some conflicting sentiments and near even splits on other issues.
This wariness combined with ambivalence was further highlighted in a recent article in Globe and Mail noting an increasing move by some Canadians, mainly those in or reaching retirement, to sell their homes and rent instead. Author Rob Carrick pointed out that these claims from a financial planner directly contradicted a recent survey "… involving 1,500 homeowners aged 50-plus, half of the participants said they'd never thought about selling their homes to generate retirement income. Four in 10 people were unwilling to consider any one of five possible ways to exploit the equity in their homes."
Mapping all this back to the currency markets, the ambivalence maps nicely to the range within which USD/CAD has bounced for almost four years. For now, I am still betting that, eventually, this range will get broken to the upside and consider dips to be buying opportunities.
Be careful out there!