In July 2025, building permits in Canada fell by 0.1%, against expectations of a 4.0% rise. The previous month saw a drop of 9.0%, and permits were down 8.2% compared to last year. However, residential construction intentions increased by $268.3 million, reaching $7.3 billion in July. On the other hand, non-residential building permits decreased by $279.2 million, totaling $4.6 billion. A separate report on capacity utilization indicated that in the second quarter (Q2), utilization was at 79.3%, slightly above the expected 78.8%. In the first quarter (Q1), this number was 80.1%. For manufacturing, capacity utilization stood at 79.3%, down from 79.9% in the previous period.

Signs Of A Cooling Economy

This data, especially the significant drop in building permits, suggests that the Canadian economy is cooling faster than expected. Instead of a 4.0% increase, we saw a small decline, indicating weaker future investment and construction. This raises questions about any further interest rate hikes from the Bank of Canada. Given these signs, it may be wise to prepare for lower interest rates in Canada in the coming months. Derivatives like Bankers’ Acceptance futures (BAX) or options on Canadian Government Bond futures could be worth considering. This information supports the idea that the Bank of Canada is more likely to cut rates than raise them next. Just last week, on September 5, 2025, the Bank of Canada kept its policy rate steady at 4.5%, citing a better balance between supply and demand. However, with the latest inflation report for August 2025 showing that the Consumer Price Index (CPI) remains high at 3.1%, this new weak data complicates their decision-making. We recall the slowdown during the rate pause in late 2023, and this situation feels similar.

Impact On The Canadian Dollar

A more cautious Bank of Canada generally puts pressure on the Canadian dollar. We might want to consider buying put options on the CAD or call options on the USD/CAD currency pair. If the market begins to expect rate cuts in early 2026, the Canadian dollar could weaken significantly against the US dollar. The weakness also varies by sector, as non-residential permits declined and manufacturing capacity utilization dropped from the first quarter. This poses a negative signal for industrial and materials companies on the Toronto Stock Exchange. To hedge against this potential downturn, we could buy put options on ETFs that focus on these sectors. Create your live VT Markets account and start trading now.

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