Canada has been the only economy to lever up since 2008 on banking as a share of GDP, while the UK has de-levered but still has a large banking sector relative to the economy. More broadly, a decade of low rates and at times ZIRP policy has facilitated financial excesses in many economies and many sectors. Confidently identifying exactly where the end of cycle trigger points are is a near impossible challenge, but we can say that the conditions were and are still in place for the effects of higher rates to manifest themselves. This feeds into our bearish bias for select high beta FX and preference for late cycle hedges including JPY.
There has been more elevated investor concern around the possible impact on credit provision to the real economy over time if bank behavior changes as a result of recent stresses. Exhibit 8 shows credit growth has been most prevalent in the US as well as small open economies (CAD, AUD, NOK, SEK). We have been highlighting the exposure to higher rates for the small open economies, particularly in areas such as housing. We continue to run SEK shorts there. CAD screens less favorable than other currencies in terms of the bank asset, credit growth and tier 1 capital metrics shown here. - J.P. Morgan Strategy
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