Dollar bloc led by CAD hit by housing market vulnerabilities - AmpGFX

The research team at Amplifying Global FX Capital, explains that notwithstanding the strength of their banking systems, the CAD and AUD and bank share prices in both countries are exhibiting financial stability risks following the stress experienced by the Canadian mortgage finance company Home Capital Group (HCG). 

Key Quotes

“The CAD fell to new lows in over a year in conjunction with a fall in HCG shares, spilling over the broader bank share prices.  Mortgage Finance Companies (MFCs) are an important cog in the financial infrastructure of Canada, accounting for around 12% of outstanding residential mortgage credit.  The financial stability risks are mitigated significantly by the fact that these mortgages are passed onto banks or the government-backed MBS market, but the MFCs’ business model has been impinged by regulatory action late last year to slow mortgage growth.  MFCs must still find short term finance to warehouse loans before origination of MBS or sale to banks.”

“Vulnerabilities lie in their low levels of capital, the lower quality of loans they warehouse, and a high cost and less stable sources of funding.  Disruption at one MFC could tighten credit conditions generally in the mortgage market, exacerbate a downturn in the housing market and have broader implications for the economy and financial stability.  The non-bank sector appears to have a much smaller footprint in Australia, but it has been growing recently.  The RBA estimates that it accounts for around 1% of mortgages.  Like MFCs in Canada, Australian non-bank mortgage originators have limited access to short-term finance to warehouse loans prior to securitization.”

“The Australian housing market has shown tentative signs of peaking after another surge in Q1.  Regulators have forced banks to ratchet up tightening in credit available for investors.  There is an apartment glut developing, of which foreign investors are an important source of demand, and they rely more on non-bank finance.  Risks in the housing market have been weighing on the AUD much of the year, and developments in Canada add one more straw to the camel’s back.  Adding to the risks for the AUD are credit tightening in China, a sudden 6.6% drop in Chinese iron ore futures prices on Tuesday, and a firmer USD as the Fed reaffirmed its course for gradual policy tightening.  Having pushed to a new low, AUD is exhibiting a downtrend, albeit a choppy one, along with CAD and NZD in the last month.  However, there are still two-way risks, including an announcement of fiscal expansion expected by the Australian government next week, which may help boost economic confidence.”