This week, we ask Canada to, “Open up and say Ahhh”, as we take a temperature check on a variety of important indicators. For this, we will lean heavily on the wonderful work of RBC Economics.

Housing

From the peak in the middle of the 2022, home prices nationwide are down about 16%:

To put this in some perspective, the average home price in March of this year is roughly at the levels of the summer of 2021. In other words, the decline in housing prices has roughly wiped away nine months of gains. We would also note, (and we acknowledge it is hard to see in the graph above) that prices in March ticked up month-over-month from ~$707k to ~$709k. While this is obviously not a big move, there is at least one data point that suggests that we may have seen the lows in house prices for this cycle.

RBC Economics notes that prices are likely responding to two things: 1) the Bank of Canada going on pause, which has likely brought some buyers back into the market; and 2) a lack of available supply as sellers continue to sit on the sidelines. This combination has helped to drive the market back to a seller’s market for the first time since mid-2022:

RBC Economics adds that while prices may have bottomed, they do not view a sharp rebound in 2023 as likely. Affordability remains challenged by a combination of still high prices and higher borrowing costs, while the overall economy remains on weaker footing. 2024 may bring some relief as the Bank of Canada is likely to be easing rates by then, while the economy is likely coming out of whatever soft patch develops through the remainder of 2023.

The Dollar

There is an episode of the Simpsons in which Homer accidentally gets his hand caught in his toaster, which ultimately breaks the machine. In his attempts to fix the toaster, Homer unwittingly creates a time machine. Each time he travels back in time, he accidently changes something (stepping on a bug, blowing up a dinosaur, etc.), which has dire consequences when he returns to the present day (his children are giants, donuts do not exist in the world, etc.). Ultimately, Homer gets frustrated and decides to destroy everything in the past with a baseball bat and when he returns to the present day, he finds things have returned to normal, except that his family all have lizard tongues. He decides this is “close enough” and he lives mostly happily ever after.

We bring this up because currencies are like the space/time continuum – there are so many moving pieces that can cause a currency to zig when it’s expected to zag that getting to a confident, accurate forecast can be, err, mind bending. Let’s first look at a chart and then comment:

Since the beginning of 2015, the Canadian dollar has averaged around $0.77 and traded within a range of ~$0.82 on the upside and ~$0.72 on the low side. In fact, it has traded within this range for ~93% of the time over the past 8+ years. This has been a remarkable period of stability for the dollar and can be instructive to what we can expect going forward. At ~$0.74, the dollar is at the lower end of the range, thus if one wanted to make a not so bold prediction for the Canadian dollar over the next 12-months, one might simply say – it’s at the low end of the range, so there might be some upside.

What would cause the dollar to break out of its range? Given we are toward the lower end of the range, one might also ask – what would cause CAD to push through the downside of the range? As mentioned, there are lots of moving pieces to a currency, but one of the biggest is relative interest rates. All else equal, if one country pays a higher interest rate than the other, this should be favourable for its currency. Given that rates in the U.S. are now higher than they are in Canada, and this gap is likely to widen a bit more in the coming months as the Bank of Canada is on pause and the U.S. Fed is not yet there, this would likely at least put a lid on any big upside moves in CAD.

It is more likely that the bigger driver would be some kind of crisis that causes a general risk-off tone in the markets. In times of distress, the U.S. dollar, which still makes up the majority of global monetary reserves, becomes a safe haven that tends to drive U.S. dollar appreciation and all-other-currency depreciation. One of the interesting things about the dollar is that its levels matter much less to the Canadian economy than they did in the past. This is because ~80% of consumption in Canada comes from domestically produced goods and services.

The Overall Economy

From a broader economic perspective, Canada continues to be a tale of two cities. On the one hand, employment remains very strong with 35,000 more jobs created in March, bringing the first quarter total to more than 200,000. Further, the overall outlook for jobs, while cooling, remains robust with labor shortages remaining the biggest issue facing businesses:

On the other hand, as the chart above reflects, both demand and credit are becoming growing concerns for businesses, which could auger some weakness in the economy as we get into the back half of the year. Overall, RBC Economics expects a mild recession in Canada with a modest recovery in 2024.