Canada's Minsky moment? No, it's complicated – Deutsche Bank

The research team at Deutsche Bank explains that the rescue of the Home Capital Group is not Canada’s Minsky moment as it is a symptom of a small unregulated alternate mortgage market running an asset liability management mismatch.

Key Quotes

“More importantly, mortgage fraud has been on a rapid increase indicating how stretched many would-be buyers are. As the Toronto housing market eventually corrects, demand particularly from construction should slow down. The CPI will be mechanically depressed and the Bank of Canada will stay on hold till December as we expect, though the market prices in a small cut. The Canadian economy is growing at a decent pace, exports ex commodities are doing well and the dispute on softwood lumber has a very limited impact.”

“Trading implications. This leaves USD/CAD to trade with oil prices for the next few days. Oil is yet to find a bottom but as we approach the May 25 OPEC meeting, the likelihood of a squeeze lower in USDCAD targeting 1.3450 should grow. From a risk management point of view, the chance of a more severe house price correction and contagion via a worsening credit and hobbled consumer demand are not priced into USD/CAD 1Y Risk Reversals. In such a tail scenario, the risk reversals would price higher US dollars particularly as Canadian banks are heavy demanders of USD in the forward space. The risk is that nothing of the sort actually happens.”