Canada’s manufacturing sales in July increased by 2.5%, surpassing the expected growth of 1.8%. This rise follows earlier declines, boosted mainly by the transportation equipment sector, which grew by 8.6% to reach $11.4 billion. The growth was driven by motor vehicles, which saw an 11.4% rise, and aerospace products, which increased by 6.5%. Sales of petroleum and coal products also rose by 6.2%, recovering from earlier refinery shutdowns.

Signs of Stabilization

Total inventories in manufacturing climbed by 0.8%, and the inventory-to-sales ratio slightly decreased. These developments suggest that the manufacturing sector is stabilizing. The Bank of Canada is set to announce its decision on interest rates soon, and a potential reduction is anticipated. The better-than-expected manufacturing data for July complicates the Bank’s rate decision this week. While the market has been expecting a rate cut, this strong economic performance gives the central bank good reason to wait. As a result, we should foresee increased volatility in Canadian assets as traders consider these mixed signals.

Opportunities and Risks in the Market

For the Canadian dollar (loonie), this situation creates a clear opportunity. The loonie has been trading around $0.73 USD for weeks, but this news might cause a significant shift. We suggest using options strategies like straddles or strangles on the USD/CAD pair to benefit from a big price movement in either direction following the Bank of Canada’s announcement. Interest rate derivatives are at a critical point. After maintaining a policy rate of 5.0% for most of the past year to tackle high inflation in 2023 and 2024, the market is now pricing in nearly an 80% chance of a 25-basis point cut this week. A contrarian move would be to bet on the Bank keeping rates steady due to strong data, which would likely cause a significant change in bond futures. In the equity markets, the data looks very positive for the industrial and manufacturing sectors. We’re considering call options on companies in the transportation equipment and aerospace sectors, which have performed exceptionally well. With core inflation dropping to 2.2% last month, a potential rate cut could further help these cyclical stocks by lowering borrowing costs and boosting economic confidence. The 6.2% increase in petroleum product sales also indicates strong domestic energy demand, benefiting Canadian oil producers. This makes us bullish on front-month futures for Western Canada Select (WCS). Overall, the implied volatility on the S&P/TSX 60 is rising, indicating that the market is preparing for a significant move in the coming days. Create your live VT Markets account and start trading now.

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