Canada’s gross domestic product was flat on a month-on-month basis in July, with output unchanged at 0%. The result matched expectations, leaving activity steady after the previous month’s movements.
A zero reading indicates the economy neither expanded nor contracted over the month. Markets and policymakers will now look to upcoming releases for direction on whether growth resumes or weakness takes hold.
Implications For The Canadian Dollar And Interest Rates
With Canada’s July GDP coming in flat at 0.0%, we believe the Canadian dollar will face renewed downward pressure against the greenback in the coming weeks. Historically, stagnant growth limits the Bank of Canada’s hawkish options, which typically drives the USD/CAD exchange rate higher as bond yield differentials widen. We recommend derivative traders focus on buying USD/CAD call options to capitalize on this expected weakness in the loonie.
This stalling economic growth strongly supports the case for the Bank of Canada to continue its monetary easing cycle. Recent financial data shows that swap markets are now pricing in a 75% probability of another 25-basis-point rate cut at the next policy meeting. To position for this pivot, we suggest traders buy short-term Canadian interest rate futures to profit from falling yields.
Impact On Equities And Trading Strategies
On the equity side, flat economic growth typically puts pressure on corporate earnings, especially in the cyclical energy and materials sectors which make up roughly 30% of the TSX index. We expect market volatility to rise as investors digest this lack of growth and adjust their year-end portfolios. Derivative traders can take advantage of this uncertainty by buying straddles on TSX index options to capture profit from any sudden, sharp market moves.
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