Canada’s Q3 GDP grew by 2.6% on an annualized basis, far exceeding the expected 0.5%. This strong performance supports the Canadian Dollar (CAD) and raises the Bank of Canada’s (BoC) threshold for potential rate cuts. Although core GDP figures show a slight dip in domestic demand of 0.1%, positive historical updates suggest a hopeful outlook for the end of 2024. In September, industry-level GDP met expectations with a 0.2% month-on-month increase. The goods-producing sectors drove this growth, even though a 0.3% drop is forecasted for October. With decreasing spare capacity leading up to 2026, recent data indicate that the BoC might postpone easing measures, maintaining the current economic policy.

Canadian Dollar Support

The strong GDP results strengthened the CAD, increasing predictions for the BoC’s terminal rate. Analysts view the CAD as undervalued above 1.40 against the US Dollar and expect it to rise if the economy stabilizes quickly or if trade deals improve. The market predicts that the USD/CAD rate may peak at 1.41 and possibly fall to 1.38 by year-end, depending on continued economic growth and a weakening USD. The unexpected 2.6% GDP growth in the third quarter significantly alters our perspective on the Canadian economy as we approach 2026. This growth suggests less spare capacity than we had assumed, making it more challenging for the Bank of Canada to consider any interest rate cuts next year. This economic strength aligns with Canada’s latest inflation report, which shows core CPI steady at 2.8%, well above the central bank’s target. The market is now expecting a much lower chance of a rate cut in the first quarter, a sharp turnaround from just weeks ago. This shift is significant, especially as recent U.S. job data shows a slight slowdown, suggesting the Federal Reserve might have more flexibility to ease.

Canadian Derivatives Market Implications

For those trading derivatives, this situation indicates that the 1.41 level in USD/CAD will likely act as a strong resistance point. Traders might consider buying Canadian dollar call options or selling covered USD call options with strikes below that level. The options market is already reflecting this change, as one-month risk reversal for USD/CAD has shifted to favor puts, signaling increased demand for downside protection. This scenario resembles what occurred in late 2023 when stronger-than-expected Canadian data led to a divergence in policy with the U.S. and prompted a significant rally in the loonie. Although the preliminary estimate for October GDP indicated a contraction, strong upward revisions and a robust Q3 result dominate the current narrative. We anticipate that the most likely path for USD/CAD is downward, targeting the 1.38 mark by the end of the year. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now