Canada’s seasonally adjusted housing starts rose to 261.4K in May, outpacing the consensus forecast of 255.1K. The release points to a faster pace of homebuilding than expected over the period.
The 6.3K gap between the actual and projected print suggests construction activity ran ahead of market estimates, based on the reported year-on-year figure. No further breakdown was provided in the headline data.
Implications For Monetary Policy And Economic Outlook
The latest housing starts data, coming in stronger than expected for May, points to continued resilience in the Canadian economy. This unexpected strength suggests underlying demand and construction activity are robust, which could contribute to inflationary pressures. As a result, we believe the Bank of Canada will be more hesitant to cut interest rates in its upcoming meetings.
Given this outlook, we are adjusting our positions in interest rate derivatives to reflect a more hawkish central bank. The market had been pricing in a nearly 50% chance of a rate cut by September, but with inflation holding firm at 2.8% and the economy showing strength, this now seems unlikely. We are therefore reducing our exposure to bets on near-term rate cuts.
Market Repositioning And Currency Impacts
This shift in rate expectations should be bullish for the Canadian dollar. With the interest rate differential likely to move in Canada’s favor, we anticipate the USD/CAD pair, which has been trading near 1.34, will face downward pressure. Over the next few weeks, we are positioning for a stronger loonie by looking at buying CAD call options.
This dynamic is similar to what we saw in 2022, when persistent economic strength repeatedly delayed the market’s expectation of a central bank pivot. Back then, data points like this one preceded a significant repricing of the entire yield curve. Therefore, we also see value in positioning for increased volatility in Canadian bonds, as the market digests this new information against its previous assumptions.
