Canada’s housing starts in May reached 279.5K, exceeding the expected 245K. The earlier figure was revised from 278.6K to 280.2K. Before the data was released, the USD/CAD exchange rate was at 1.3564, its lowest since October. This indicates that construction is still active, even as prices drop in some areas.

Stronger Than Expected Construction

These numbers reveal that homebuilding in Canada is much stronger than anticipated. In May, new housing projects began construction, surpassing forecasts by over 34,000 units. Revisions to April’s figures also pushed this number higher. Despite declining prices in many provinces, developers seem confident, possibly due to ongoing demand from migration and population growth. We cannot overlook that government initiatives aimed at increasing housing supply, especially in busy city areas, could be impacting these numbers sooner than expected. From a trading perspective, if we consider the overall economy, a high rate of construction could pressure the Bank of Canada to change its current policy. Strong construction activity might counterbalance dropping prices in the bank’s inflation assessments, potentially limiting expectations of aggressive rate cuts soon. The USD/CAD exchange rate reacted to this, with the loonie strengthening before the release and reaching its lowest point against the U.S. dollar since last fall. For traders, the implied volatility around interest rate expectations seems slightly off. With stronger housing data, it becomes harder to justify multiple rate cuts this year, especially since other indicators, such as employment and retail numbers, haven’t shown a significant decline. This may lead to broader shifts in short-term rate derivatives, particularly in mid-to-late tenor contracts.

Reassessing Market Strategies

While patience is necessary, we should closely monitor cross-asset correlations, particularly how housing trends influence Canadian bank stocks and local government bond spreads. Traders involved with CAD-linked instruments may want to reassess their positions, as physical demand appears stronger than previously realized. If market prices continue to reflect a struggling consumer sector while housing remains steady or grows, we may need to rethink duration risk. We are preparing for a scenario where rate policy is less aggressive than currently priced, which could challenge the performance of short-end receivers. It’s a delicate balance now as local fundamentals weigh against global disinflation trends. Create your live VT Markets account and start trading now.

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