Canada’s real gross domestic product slipped 0.1% month on month in March, coming in below the 0% consensus expectation. The print points to a mild contraction at the end of the first quarter, after a period in which monthly output had been broadly flat.
The data mark a softer-than-forecast reading for March, with the 0.1% decline undershooting estimates that had called for no change. Monthly GDP is a key input into assessments of near-term growth momentum and can shape expectations for the economic outlook.
Implications For Monetary Policy And Currency
The surprise economic contraction of -0.1% for March confirms the cooling trend we have been anticipating. This data point, even though it is from two months ago, significantly strengthens the case for the Bank of Canada to begin cutting interest rates. Recent inflation figures showing a dip to 2.6% further support the view that the central bank has room to act.
We believe this puts direct downward pressure on the Canadian dollar, especially against the US dollar where the Federal Reserve remains more hawkish. Historically, periods of monetary policy divergence have led to a weaker CAD, as seen in 2015 when the BoC cut rates while the Fed held firm. We are therefore considering buying call options on the USD/CAD pair to capitalize on this expected trend over the next several weeks.
Market Strategies And Economic Outlook
This economic weakness also makes Canadian interest rate futures attractive, as the market is now pricing in over a 75% probability of a rate cut by the Bank of Canada’s July meeting. We see value in going long contracts like the Three-Month Canadian Bankers’ Acceptance Futures (BAX) to position for falling yields. The weak GDP figure is the catalyst that could push these probabilities even higher.
For the equity market, a slowing economy is a headwind for the S&P/TSX 60 index, particularly for rate-sensitive sectors like banks and consumer discretionary stocks. We are looking to buy protective put options on ETFs that track the broader Canadian market, such as XIU. This strategy allows us to hedge against a potential downturn driven by weaker corporate earnings in the upcoming quarters.
