The Bank of Canada has reported that tariffs and uncertainties are affecting business outlooks. According to the Q2 Business Outlook Survey, the direct impact of tariffs has decreased compared to Q1. Fewer companies focused on exports expect the worst tariff scenarios. Most companies plan to maintain their current staffing levels and limit their investments to necessary maintenance. About 23% of businesses expect inflation to stay above 3%, while 43% expect lower labor costs in the next year, leaving 9% expecting higher costs.

Consumer Expectations of Recession

Consumers are predicting a recession, with 64.5% expecting one within the next year, down slightly from 66.5% in Q1. Sales figures show that 24% of firms reported a drop in sales in the past year, down from 28% in Q1. For inflation, consumer expectations over the next five years rose to 3.45%. Additionally, 28% of firms believe Canada will face a recession in the upcoming year, a decrease from 32% last quarter. Despite some improvements, a significant number of Canadian consumers still foresee recessionary conditions in the next year. The outlook for future sales indicators has dramatically dropped from +22 in Q1 to -6.

Economic Uncertainty Ahead

The mixed signals between business and consumer attitudes indicate increased market volatility. The unexpected drop in the sales forecast from +22 to -6, even with other small improvements, points to ongoing economic uncertainty. In this environment, buying options to capitalize on price changes may offer better opportunities than straightforward bets. With nearly two-thirds of consumers expecting a recession, adopting a bearish outlook seems wise. The Bank of Canada already reduced rates to 4.75% in June, the first cut in four years, recognizing the slowing economy. We see value in purchasing put options on broad market ETFs, such as the iShares S&P/TSX 60 Index ETF (XIU), to safeguard against possible downturns. The difference between consumer expectations for five-year inflation at 3.45% and the actual annual inflation rate, which slowed to 2.7% in May, leads to uncertainty about interest rates. This gap suggests that future rate cuts are not guaranteed. Derivatives tied to the Canadian Dollar Offered Rate (CDOR) or bond futures may be beneficial for speculating on how quickly the central bank will adjust its policies. Firms planning to limit investments and anticipating lower labor costs align with a cooling economy. This is supported by the latest Statistics Canada report showing the national unemployment rate has increased to 6.2%. Such data back strategies that limit risk, like selling out-of-the-money call option spreads in key Canadian sectors, such as financials or energy. The difference in monetary policy with the United States, where the Federal Reserve is keeping interest rates steady, creates downward pressure on the Canadian dollar. If Canada continues to lower rates to support its economy, the currency may weaken further against the US dollar. Therefore, buying call options on the USD/CAD currency pair looks promising. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now