Canada’s GDP for the fourth quarter was reported at an annualised rate of -0.6%. This was below expectations of 0%.
The result means the economy shrank over the quarter on an annualised basis. The expected outcome had been no growth.
The fourth-quarter GDP contraction of -0.6% for 2025, which badly missed the flat expectation, confirms the Canadian economy is weaker than we thought. This puts significant pressure on the Bank of Canada to adopt a more dovish stance and consider cutting interest rates. Our immediate response is to position for a weaker Canadian dollar, as monetary policy is now likely to diverge further from that of the United States.
Looking at the latest data, January’s inflation remained sticky at 2.9%, while unemployment recently ticked up to 5.8%, painting a picture of a slowing economy that complicates the central bank’s next move. This environment suggests that even if the Bank of Canada doesn’t cut rates at its next meeting, its forward guidance will likely be very cautious. We are therefore looking to buy USD/CAD call options with expirations in the second quarter to capture this expected weakness in the loonie.
This negative growth is also a headwind for Canadian stocks, especially the big banks and consumer-focused companies on the TSX. Historically, periods of negative GDP surprises, like the one we saw through much of 2025, have led to Canadian equities underperforming their U.S. counterparts. Consequently, buying put options on a broad Canadian market index ETF provides a direct way to position for potential downside over the next several weeks.
In the interest rate market, we’ve seen a sharp repricing, with derivatives now suggesting a much higher probability of a rate cut by mid-year. This negative GDP print solidifies that view and should keep downward pressure on front-end bond yields. Traders should consider positions that will benefit from falling short-term rates, such as futures based on the Canadian Overnight Repo Rate Average (CORRA).
