Oppenheimer’s de Longis Shorts Loonie on Housing Drop

A bet the crash in oil prices will push Canada’s record consumer debts and inflated housing market over the edge has become one of Alessio de Longis’s favorite trades.

The New York-based strategist at Oppenheimer Holdings Inc. says the currency has further to fall after speculators pushed wagers against the Canadian dollar to the highest in a year last week as the country reported record consumer debts and the price for crude oil, its largest export, plunged toward a six-year low.

After one surprise interest rate cut already this year, oil’s collapse will force the Bank of Canada to cut rates to zero, adding fuel to a housing market the central bank itself has already said is as much as 30 percent overvalued, according to de Longis.

“The housing market in Canada today is pretty much where the U.S. was five years ago,” he said in a March 13 interview. “It’s basically unsustainable, just like the U.S. market was.”

With the currency already trading at C$1.2787 per U.S. dollar, near its weakest in six years, de Longis is calling for it to fall further to between $1.30 and $1.32 in the next six months.

Bets by hedge funds and other large speculators against the Canadian dollar outnumbered those in its favor by 39,030 contracts as of March 10, the most net-short positions in almost a year, according to data released last week from the Washington-based Commodity Futures Trading Commission.

The Bank of Canada shocked financial markets with a surprise interest-rate cut in January to 0.75 percent, a move it called “insurance” against the negative effects of oil’s plunge.

Housing Market

Falling oil prices have already started hitting Canada’s job market, with Alberta, home to the bulk of Canada’s proven oil reserves, posting a 14,000 decline in employment in February and its highest jobless rate since 2011, according to a report last week.

While Oppenheimer’s de Longis doesn’t see in Canada the same widespread subprime lending and securitization that led to the U.S. crash, he isn’t alone flagging the housing market as reason for renewed concern. International Monetary Fund economists issued a warning on economic vulnerabilities from Canadian housing earlier this month, including the growth of riskier uninsured mortgages.

Mortgage Lending

While the nation’s largest banks, whose conservative lending helped them escape the financial crisis, have resisted lowering mortgage rates as their own funding costs plunged, that’s left an opening for smaller lenders such as credit unions, whose mortgage lending has outpaced the average since 2013, strategists at Montreal-based Pavilion Financial Corp. wrote in a March 13 note.

Canadian non-bank lenders are even riskier than their U.S. peers, with an average leverage ratio of 20 times compared to four times, according to Pavilion, which has a negative view on the Canadian dollar.

“These lenders are picking up the marginal borrowers, or the borrowers who get turned down by banks.” said the report. “These types of leveraged balance sheets don’t leave much room for error.”

(Corrects spelling of Pavilion in the third from last paragraph. The story ran Monday.)
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