Category: Market Action

OSFI has announced Interim arrangements for the regulatory capital and liquidity treatment of cryptoasset exposures:

Cryptoassets are broadly categorized into two groups – Group 1 and Group 2. Group 1 cryptoassets are those that meet the following set of criteriaFootnote3:

They are digital representations of traditional assetsFootnote4 using cryptography, distributed ledger technology or similar technology to record ownership.
A legal opinion has been obtained confirming that all rights, obligations and interests arising from the cryptoasset are: clearly defined, legally enforceable in all relevant jurisdictions, and consistent with the rights, obligations, and interests associated with comparable traditional assets.
A legal opinion has been obtained confirming settlement finality of the cryptoasset.
All entities performing transfer, settlement or redeemability functions of the cryptoasset follow robust risk governance and risk control policies and practices to address all significant risksFootnote5.
All entities that execute redemptions, transfers, storage, or settlement finality of the cryptoasset, or manage or invest reserve assets, are regulated and supervised, or subject to appropriate risk management standards. For a stablecoin to receive Group 1 treatment, the issuer must be prudentially regulated and subject to capital and liquidity requirements that are comparable to those of OSFI.
Group 2 cryptoassets are those that fail to meet one or more of the above criteria.

A cryptoasset exposure is a Group 1 exposure if its value or risk is substantially determined by the value of a Group 1 cryptoasset. Otherwise, it is a Group 2 cryptoasset exposure.

The above constitutes a simplified categorization relative to the second consultation paper on the prudential treatment of cryptoassets published by the Basel Committee on Banking Supervision (BCBS) in June 2022
…
Group 2 cryptoasset exposures in the banking book should be deducted from Common Equity Tier 1 (CET1) capital. As short positions have unlimited risk, short positions in cryptoasset exposures are not permitted in the banking book, consistent with the treatment of other short positions. The treatment of Group 2 cryptoasset exposures in the trading book is outlined in Section 4.4 below.

TXPR closed at 618.38, down 0.56% on the day. Volume today was 914,630, third-lowest of the past 21 trading days.

CPD closed at 12.34, down 0.40% on the day. Volume was 62,660, near the median of the past 21 trading days.

ZPR closed at 10.35, down 0.67% on the day. Volume of 119,500 was near the median of the past 21 trading days.

Five-year Canada yields were up to 3.03% today.

PerpetualDiscounts now yield 6.05%, equivalent to 7.86% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.78%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 310bp reported August 10.

Canadian inflation came in as expected:

Canada’s annual inflation rate slowed to 7.6% in July, a two month low but still far above the Bank of Canada’s 2% target, as gasoline prices eased even though food prices rose at a 40-year high, Statistics Canada data showed on Tuesday.

The headline number matched analyst forecasts and was down from 8.1% in June. On a month-over-month basis, the index rose 0.1%, again matching forecasts.

CPI common, which the central bank says is the best gauge of the economy’s performance, was at 5.5%, while June’s CPI common was revised sharply up to 5.3%. CPI median edged up to 5.0% in July, while CPI trim eased slightly to 5.4%.

Gasoline prices rose 35.6% in July on an annual basis, slowing from a 54.6% increase in June. Gas prices fell 9.2% in July from June, the largest monthly decline since April 2020.

Grocery prices increased by 9.9% in July, the largest gain since August 1981 and up from 9.4% in June, as the cost of everyday staples such as baked goods and eggs accelerated.

… but the market reacted anyway:

The Canadian dollar strengthened against its U.S. counterpart on Tuesday as investors raised bets on another oversized interest rate hike by the Bank of Canada next month after domestic data showed rising underlying inflation pressures.
….
Money markets were pricing in 59 basis points of tightening by the central bank at its next policy announcement on Sept. 7, up from 53 basis points before the data. In July, the BoC hiked by a full percentage point.

The Canadian dollar was trading 0.5% higher at 1.2840 to the greenback, or 77.60 U.S. cents, clawing back some of the previous day’s sharp decline that came as the U.S. dollar broadly rallied. It traded in a range of 1.2832 to 1.2928.
…
Canadian government bond yields jumped across a flatter curve.

The 2-year touched its highest since July 14 at 3.372% before dipping to 3.336%, up 12.7 basis points on the day, while the 10-year was up 8 basis points at 2.775%.

Tiff Macklem wrote in the Financial Post:

The best way to protect people from high inflation is to eliminate it. That’s our job, and we are determined to do it. Tuesday’s inflation number offers a bit of relief, but unfortunately, it will take some time before inflation is back to normal. We know our job is not done yet — it won’t be done until inflation gets back to the two per cent target.

Canadian real estate is getting hurt in a thin market:

The Canadian Real Estate Association says home sales fell for the fifth consecutive month between June and July, but the latest drop was the smallest of the five.

On a seasonally adjusted basis, the association says sales in July fell 5.3 per cent compared with June. The actual number of sales last month was 37,975, down 29 per cent compared with July last year.

The average sales price was $629,971, down five per cent from $662,924 last July and on a seasonally adjusted basis amounted to $650,760, a three per cent drop from June.

Meanwhile China is cutting policy rates:

China’s central bank cut key lending rates in a surprise move on Monday to revive demand as data showed the economy unexpectedly slowing in July, with factory and retail activity squeezed by Beijing’s zero-COVID policy and a property crisis.

The grim set of figures indicate the world’s second largest economy is struggling to shake off the June quarter’s hit to growth from strict COVID-19 restrictions, prompting some economists to downgrade their projections.

Industrial output grew 3.8% in July from a year earlier, according to the National Bureau of Statistics (NBS), below the 3.9% expansion in June and a 4.6% increase expected by analysts in a Reuters poll.

Retail sales, which only just returned to growth in June, rose 2.7% from a year ago, missing forecasts for 5.0% growth and the 3.1% growth seen in June.

… and the CAD’s hurting:

The Canadian dollar CADUSD -0.94%decrease
fell to a one-week low against its broadly stronger U.S. counterpart on Monday, as disappointing Chinese economic data stoked fears of a global slowdown and ahead of a key domestic inflation report this week.

Global shares fell and the safe-haven U.S. dollar rallied against a basket of major currencies after data showed China’s economy unexpectedly slowed in July.

US inflation was down a little this month:

Inflation cooled in July as gas prices and airfares fell, a welcome reprieve for consumers and economic policymakers but not yet a conclusive sign that price increases are turning a corner.

The Consumer Price Index climbed 8.5 percent in the year through July, compared with 9.1 percent the prior month, a bigger slowdown than economists had projected. After stripping out food and fuel costs to get a sense of underlying price pressures, prices climbed by 5.9 percent through July, matching the previous reading.

• On a monthly basis, the price index did not move at all in July. That’s because fuel prices, airfares and used cars declined in price, offsetting increases in rent and food costs.
• Core inflation was also slower than economists had expected on a monthly basis, climbing by 0.3 percent. In June, that figure was 0.7 percent.
• Today’s report is probably welcome news at the White House and the Federal Reserve, both of which have been waiting for inflation to decelerate.
• But it’s easy to overstate how much July’s slowdown matters. Inflation is still abnormally high. The decline owed in large part to gas prices, and they can always jump again.
• There are some real reasons to believe inflation will slow in the months ahead: Supply chain pressures, for instance, show signs of easing.
• But there are also reasons to worry. Wage growth remains rapid. And housing costs, particularly rents, continue to climb, which could keep inflation high for some time.

This was reflected in the New York Fed’s underlying inflation gauge:

• The UIG “full data set” measure for July is currently estimated at 4.7%, a 0.1 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for July is currently estimated at 5.9%, a 0.1 percentage point decrease from the current estimate for the previous month.
• The twelve-month change in the July CPI was +8.5%, a 0.6 percentage point decrease from the previous month.
  • -For July 2022, trend CPI inflation is estimated to be in the 4.7% to 5.9% range, a similar range to June, but with its lower and upper bounds both 0.1% lower.

PerpetualDiscounts now yield 6.03%, equivalent to 7.84% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.73%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 310bp reported August 3.