Forex Flash: BoC looks to tackle household imbalances – UBS

The Bank of Canada will attempt to curb 'household imbalances', referring to the chances of a deep housing correction, with adverse effects on household balance sheets and credit demand. Just over a month ago, Moody's downgraded six Canadian banks on the back of expectations that household deleveraging would affect asset quality and profitability.

“In terms of trajectory, house prices are finding it difficult to maintain the robust growth seen post-crisis, and consequently consumer credit growth is being dragged lower as households can no longer source marginal credit due to asset deterioration.” warns Research Analyst Gareth Berry at UBS.

However, this is where CAD bears should probably take a step back and ask whether the situation is bad enough to justify aggressive upside USD/CAD targets such as 1.1000. House price momentum has indeed fallen sharply, but even on a sequential basis, Statistics Canada's house price index has only registered one monthly decline since July 2009 (July 2010). It is quite telling that the BoC used 'evolution' to describe the current correction in imbalances – implying the process can be managed in an orderly manner. In addition, despite the downgrades, capital needs of Canadian banks are not in question, which itself should attract a premium in the current environment.