J.P.Morgan: Housing A Medium-Term Structural Support For USD/CAD

J.P.Morgan note that “CAD FX has weathered the local downturn in housing, but we think it becomes more germane to the FX outlook going forward.”

• “There are a number of reasons for CAD’s imperviousness, which span the composition of Canadian housing ownership, a smaller proportion of variable rate mortgages than G10 peers, flexibility in some variable rate terms, immigration and regulation.”
• “CAD has therefore not shown a clear discount vs fair value to reflect housing risk, unlike some G10 peers. Rather, housing has arguably been CAD-positive this year as activity has stabilized, allowing the BoC to continue hiking and sponsoring a material improvement in CAD rate differentials.”
• “But some of these supports could have a limited shelf-life in the higher-for-longer environment. The cumulative impact from mortgage resets, worsening debt service, increased supply, and softening labor markets suggest that housing should be a relative cyclical differentiator vs the U.S., and so should be more impactful on USD/CAD going forward.”
• “Longer-term, higher debt and debt servicing burdens should be a structural support to USD/CAD. We find that USD/CAD has been correlated to Canada’s relatively-higher levels of debt/income since 2010.”