Canada’s real GDP fell at an annualised rate of 0.6% in the fourth quarter, according to Statistics Canada. This compared with 2.4% growth in the previous quarter and a market forecast of 0%.
On a quarterly basis, GDP slipped 0.2% after a 0.6% rise in the third quarter. Statistics Canada reported that real GDP grew 1.7% in 2025, the weakest annual growth rate since the decline in 2020.
Drivers Of The 2025 Slowdown
The agency said lower exports were the main reason for the slower growth in 2025. It noted that exports to the United States were a key factor.
After the release, USD/CAD showed little movement. It was trading unchanged at 1.3680.
We see the unexpected Q4 GDP contraction as a clear signal that the Canadian economy is weaker than markets had anticipated. This significantly increases the probability that the Bank of Canada will be forced to cut interest rates in the coming months, likely before the US Federal Reserve. This policy divergence is now the central theme for our trading strategy.
The market’s initial muted response in USD/CAD is a window of opportunity before a wider repricing occurs. Current data from this month shows Canada’s unemployment rate has already ticked up to 6.2%, while core inflation has eased to 2.5%, giving the central bank room to act. We should therefore consider buying call options on USD/CAD, targeting strikes above 1.3800 for the second quarter, to position for a weaker Canadian dollar.
Historical Parallel And Equity Derivatives
Looking at historical patterns, we recall the economic slowdown of 2015 when the Bank of Canada initiated a surprise easing cycle. In that year, USD/CAD rallied sharply as interest rate differentials widened against Canada. The current setup, with growth contracting and exports to the US slowing, mirrors the initial stages of that period.
For equity derivatives, this negative growth report suggests corporate earnings for Canadian companies will face significant headwinds. The 1.7% annual growth we saw in 2025 was the slowest since the 2020 contraction, which is a bearish signal for the broader market. We view buying put options on S&P/TSX 60 index ETFs as a prudent hedge against a potential decline in Canadian stocks.
Given the surprise nature of this economic data, implied volatility in the options market appears relatively low. This suggests traders can establish long volatility positions, such as straddles, at a reasonable cost. These positions would profit from a significant move in either direction as the market digests the possibility of a Canadian recession.
