The Canadian economy grew unexpectedly in Q3, showing a 2.6% annual increase after facing challenges from trade tensions. This growth mainly resulted from a significant drop in imports, which balanced out exports that had stagnated following a sharp decline in the previous quarter. Statistics Canada had to make special estimates for export data because of a U.S. government shutdown, which may lead to major revisions in trade stats soon. Domestic demand has stayed weak after a strong previous quarter. Although construction and government spending helped soften the downturn, household consumption fell by 0.4%, marking the worst performance since the pandemic. This drop in spending is tied to weak retail sales in a tough job market. Investment in machinery and equipment also plummeted, down 14.9% over two quarters to its lowest level since early 2021.

Economic Assessment

Even with better-than-expected growth, the overall economic assessment remains stagnant. Consumers are struggling in a fragile job market, and investment is low. Growth was just 0.2% in September, compared to a preliminary decline of 0.3% in October, which could indicate weak performance in Q4. Inflation pressures continue despite the economic fragility, impacting the Bank of Canada’s decisions. Looking at the Q3 GDP report, while the 2.6% headline growth seems impressive, it’s misleading. This growth came from a sharp drop in imports, not actual strength in the economy. The details reveal significant weaknesses that should influence our trading strategies in upcoming weeks. Final domestic demand was nearly flat, and household consumption fell 0.4%, the worst it’s been since 2020. Recent data shows Canada’s unemployment rate has risen to 6.3% as of October 2025, and retail sales have been stagnant for two months. These statistics confirm that Canadian consumers are under considerable stress. The Bank of Canada is unlikely to reduce interest rates soon, as the latest Consumer Price Index (CPI) for October 2025 shows inflation at a persistent 3.4%, above the target level. This situation of weak growth and ongoing inflation suggests the Bank will likely stay out of the rate-cutting game. Therefore, betting on aggressive rate cuts in early 2026 seems misguided, and preparing for a “higher for longer” interest rate environment makes sense.

Canadian Dollar and Equity Markets

This lackluster domestic situation is negative for the Canadian dollar, especially with machinery and equipment investment at its lowest since early 2021. Looking back to 2015-2016, similar declines in Canadian investment and consumer activity led to a prolonged period of CAD weakness against the USD. We should think about using options to bet on a lower CAD/USD exchange rate. In equity markets, the decline in consumer spending and business investment poses challenges for the S&P/TSX Composite Index. Key sectors like consumer discretionary and industrials are especially at risk in this environment. Buying put options on broad Canadian market ETFs could be a smart hedge or bet on continued economic softening into Q4. There’s also significant uncertainty about the trade data, as it was based on special estimates due to the U.S. government shutdown in October. Any downward revisions in the future could negatively impact the market. This heightened uncertainty hints that volatility may increase, making long volatility positions potentially beneficial strategies. Create your live VT Markets account and start trading now.

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