In June, the Canada New Housing Price Index fell by 0.2% compared to the previous month. This drop was greater than the expected 0% change. The Index serves as an economic indicator that shows trends in Canada’s housing market. It tracks the prices of newly built homes across the country.

Impact Of Higher Borrowing Costs

The unexpected decline in the New Housing Price Index clearly indicates that rising borrowing costs are cooling the market. This decline, especially seen in major cities, points to strained consumer purchasing power. We should prepare for further softening in the real estate sector. This housing data creates a challenge for the Bank of Canada, which raised its policy rate to a 22-year high of 5.0% in July to tackle ongoing inflation. However, new data for July shows inflation unexpectedly rose again to 3.3%, putting the central bank in a tough spot. We believe the weakening housing market may lead them to pause rate hikes, despite the inflation figure. For interest rate derivatives, this presents opportunities to bet that the central bank will not raise rates in September. We are looking into positions that could benefit from rates stabilizing or falling sooner than expected. Historical data from the early 1990s demonstrates how aggressive rate hikes can lead to long housing downturns, which policymakers will want to avoid.

Currency And Equities Strategy

This economic outlook may put downward pressure on the Canadian dollar, especially if the U.S. Federal Reserve continues to be aggressive with its rates. We should consider strategies that profit from a weaker Canadian dollar against the U.S. dollar, like buying put options on the currency. Divergent central bank policies typically drive currency pair movements. We also expect financial and real estate equities will underperform. Canadian bank stocks, which have significant mortgage exposure, may struggle due to slowing loan growth and increasing credit loss provisions. We see put options on major bank ETFs or homebuilder stocks as a smart way to hedge against, or benefit from, this anticipated sector decline. Create your live VT Markets account and start trading now.

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