The Bank of Canada’s latest survey shows a slight improvement in Canadian business sentiment, but expectations for growth are still low. Many companies point to US tariffs as a major hurdle for trade and growth. The Q3 Business Outlook Survey reveals this gradual improvement, but intentions for future growth still remain weak. The Business Service Indicator shifted from -2.40 in Q2 to -2.28, and the balance of future sales improved from -6.0 to 0.0.

Businesses and Consumer Expectations

Sales have dropped for 27% of companies over the past year, an increase from 24% in Q2. Additionally, 33% of firms expect a recession, up from 28%. On the inflation front, 18% expect rates to exceed 3% over the next two years, down from 23%. Regarding costs, 35% of firms predict lower labor costs, while 14% anticipate increases. The Q3 Survey of Consumers indicates that 64.1% of Canadians foresee a recession, slightly down from 64.4%. Consumer expectations for inflation over the next five years have risen to 3.67%, up from 3.45% in Q2. This survey offers a view of current economic sentiment among businesses and consumers amid various trade and economic issues. The Bank of Canada’s survey illustrates a divided economy, providing opportunities in derivative markets. While business sentiment is improving, one-third of firms expect a recession within a year, and consumer concerns are high. This situation complicates matters for the central bank, likely leading to a pause in interest rate changes for now.

Positioning and Strategy

We see inflation data as a critical factor that will create volatility in the coming weeks. With consumer projections for inflation rising to 3.67%, the Bank of Canada must take note. This data aligns with the recent Statistics Canada report for September 2025, which recorded a steady annual CPI rate of 3.4%, above the 2% target. This mix of persistent inflation and weak sales growth is a challenge for the Canadian dollar. With US trade tariffs affecting export outlooks, we expect the CAD to struggle, especially if upcoming Canadian job data reveals weakness. Historically, similar conditions from late 2023 to early 2024 led to prolonged underperformance of the CAD against the USD. In light of this, we suggest buying put options on the CAD/JPY pair. A risk-off sentiment is likely to strengthen the yen while fears about the Canadian economy weigh on the loonie. Additionally, selling out-of-the-money call options on USD/CAD could be worthwhile, as we anticipate that the pair won’t drop significantly. This strategy allows us to profit from expected range-bound, modest upward movement in the currency pair. In the interest rate market, the mixed signals create uncertainty about the Bank of Canada’s next steps. We can take advantage of this by purchasing straddles on the futures for the 2-year Government of Canada bond yield ahead of the next policy meeting. This position will be profitable whether the bank opts for a hawkish hold due to inflation concerns or makes a dovish pivot due to recession worries. Create your live VT Markets account and start trading now.

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