In June, Canada’s GDP declined by 0.1%, falling short of the expected 0.1% growth. May also saw a 0.1% decrease in GDP. For July, an initial estimate suggests a slight GDP increase of 0.1%. In the second quarter, GDP fell at an annualized rate of 1.6%, worse than the anticipated drop of 0.6%. This decrease follows a previous figure of 2.2%, which was later revised to -2.0%.

Canadian Dollar Weakens

The Canadian dollar weakened after the data release. This decline was due to lower exports and reduced business investment in machinery and equipment. However, these losses were somewhat balanced by increased business inventory growth, more household spending, and decreased imports. In response to the data, traders raised their expectations for a rate cut by the Bank of Canada. They now expect 27 basis points of easing by the end of the year, up from 24 basis points before the announcement. The unexpected downturn in the second quarter, along with the significant downward revision for the first quarter, confirms that Canada is in a technical recession as of August 2025. This puts more pressure on the Bank of Canada to lower interest rates to stimulate growth. The current market expectation of one 25 basis point cut by year-end now seems too cautious.

Anticipating Rate Cuts

We should expect ongoing weakness in the Canadian dollar. A direct strategy is to use options to bet on a stronger USD/CAD, such as buying out-of-the-money calls for leveraged exposure to a price increase. Looking back at the 2015 oil price crash, which also impacted Canadian exports, the loonie fell by over 20% against the US dollar in a similar period of central bank easing. This data signals a clear opportunity to wager on lower interest rates with tools like CORRA overnight index swaps. With Canada’s unemployment rate rising to 6.5% in the latest job report, the central bank faces a dual challenge that now leans heavily towards supporting employment. We should expect at least two rate cuts before the year’s end, surpassing current market estimates. The drop in business investment raises concerns for corporate earnings and the broader S&P/TSX index. We can buy put options on Canadian equity index ETFs to profit from or protect against a market decline. This unexpected economic weakness is likely to boost market volatility, leading to higher option premiums soon. The preliminary estimate of a slight 0.1% rebound in July does not counteract the ongoing negative trend. We will closely monitor the next inflation report for signs of cooling from the recent 2.5% reading. Any data indicating disinflation will give the Bank of Canada clear grounds to start a more aggressive easing cycle. Create your live VT Markets account and start trading now.

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