Loonie Drops as Canadian Household Credit Reaches Record Highs

The USD/CAD recovered and tested a trend high as household leverage increased in the third quarter. Consumers are taking on more and more credit given the low levels of interest rates which could be a concern to the Bank of Canada. This combined with recent better than expected U.S. economic data has pushed the current pair higher.

Canada’s household leverage increased in Q3, as the ratio of household credit market debt to personal disposable income rose to a record high 162.6% in Q3 from 161.5% in Q2. While the rise in the debt to income ratio is likely unwelcome news for the Bank of Canada (BoC), the central bank will eventually reign in the debt to income ratio.

Households continued to accumulate additional liabilities in Q3, but the pace was identical to Q2′s 1.5% clip. The pace of liability growth jumped after the 0.3% growth clip in Q1 but recall that consumption was disrupted by weather in Q1, temporarily suppressing the pace of liability accumulation. A rebound in consumption lifted the pace of liability growth in Q2 and strong consumption sustained that clip in Q3.

Household asset values grew at a 1.3% rate in Q3 after the 2.1% rate in Q2. The 2.8% pace in Q1 of 2014 and Q4 of 2013 were the fastest growth rates since Q3 of 2010′s 2.9%. Total non-financial asset growth edged lower to a 1.8% rate from 2.1% in Q2. A still firm 1.8% growth rate of household real estate values led the way. Yet total financial asset growth slowed sharply to a 0.9% pace in Q3 from 2.1% in Q2, as equity valuations rose just 0.2% in Q3.

Overall, the net worth report does not alter the outlook for steady policy for an extended period from the Bank of Canada. Of course, an improving economy in the U.S. and continued growth in Canada in 2015 will set the stage for modest rate hikes late next year or early in 2016. While Governor Poloz was, not surprisingly, adamant that the central bank does not set rates based on household debt or housing, direct action would likely be welcome as it would lessen the downside risks posed by household debt.

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