Summary:

• Canadian housing starts rise more than expected
• However, building permits decline by the most in 5 months
• CAD edging higher with USDCAD retesting the 1.25 handle

There has been much speculation surrounding the health of the Canadian housing market of late, with recent rate hikes from the Bank of Canada (BOC) seen by some as a deliberate attempt to cool the rapid house price growth. The BOC has surprised markets by raising rates twice in each of the last two meetings and due to the housing market being so sensitive to base rates, traders may look to the housing markets for clues as to the chances of further increases.

First off, the number of housing starts came in better than expected with a reading of 217k vs consensus forecasts of 211k (the prior reading was also revised slightly higher to 226k from 223k.) This indicator remains close to its highest level of the past decade with a 6 period SMA at 214.

 Canadian housing starts for September came in above forecasts and this data point remains close to its highest level of the past decade. Source: Bloomberg

Whilst an increase in the number of housing starts is seen as positive for the housing market, a release shortly after has taken some of the gloss off of it. Building permits M/M showed a fairly sharp decline of 5.5% in what was the biggest fall for this indicator since the May release. Having said that, two factors should dampen the negativity of this second release with the first being that the data refers to an earlier time period (August) during which the number of housing starts has subsequently been revised higher. Secondly, there is a fairly strong negative seasonality effect here, with the latest release date being on average the weakest of all since 2012. 

 Building permits experience a fairly sharp drop but this release has experienced fairly negative seasonality previously. Source: xStation

Both these data points are generally seen as second tier and as such the lack of a buig reaction to them shouldn’t come as too much of a surprise. The latest employment report from Canada was fairly positive and the overall economic backdrop for the country is looking fairly healthy especially if oil prices remain not far form their highest levels in two years. 

 USDCAD is showing some signs that the recent uptrend could be coming to an end. Source: xStation

The USDCAD has been in what could be labelled a corrective bounce for the past month after the market hit its lowest level since May 2015 in early September when price traded with a 1.20 handle. The rise has been in part due to the recovery seen in the USD following the last Fed meeting and there are some signs that the recent move higher is over. Firstly the 8 (blue) and 21(yellow) period EMAs on a H4 chart have printed a bearish cross after being in a positive orientation for much of the move higher. Secondly the market is now approaching a rising trendline from the lows (purple line below). Should this break then the case for the recent uptrend coming to an end would gain in credence.