Insights 
VT 
Canada’s Q3 GDP recorded a 2.6% annualised quarterly growth, considerably surpassing the expected 0.5%. This unexpected performance elevates the Canadian Dollar (CAD) and increases the threshold for potential reductions by the Bank of Canada (BoC). While the GDP core figures show a dip in domestic demand by 0.1%, positive historical revisions provide an optimistic outlook for the end of 2024.
Industry-level GDP matched expectations with a 0.2% month-on-month increase in September. Goods-producing sectors led this growth, despite a forecasted 0.3% contraction being estimated for October. With there being less spare capacity leading into 2026, the recent data suggest BoC might delay easing measures, reinforcing the current economic stance.
Canadian Dollar Support
The robust GDP outcome bolstered CAD, driving higher predictions for the BoC’s terminal rate. The CAD is considered undervalued above 1.40 against the US Dollar and may rally with either a quick economic stabilisation or favourable trade deals. Market expectations are that the USD/CAD rate will cap at 1.41 and potentially dip to 1.38 by year-end, conditional on sustained economic momentum and broader USD weakening.
The unexpected 2.6% GDP growth in the third quarter fundamentally changes our view on the Canadian economy heading into 2026. This strength suggests the economy has less spare capacity than we previously thought. Consequently, the Bank of Canada now has a much higher bar to clear before considering any interest rate cuts next year.
This economic resilience lines up with Canada’s latest inflation report, which showed core CPI holding firm at 2.8%, well above the central bank’s target. The market is now pricing in a significantly lower probability of a rate cut in the first quarter, a sharp reversal from just a few weeks ago. This policy divergence is notable, as recent U.S. jobs data showed a slight cooling, hinting the Federal Reserve may have more room to ease.
Canadian Derivatives Market Implications
For derivative traders, this reinforces the idea that the 1.41 level in USD/CAD will act as a strong ceiling. We should look at buying Canadian dollar call options or selling covered USD call options with strikes below that level. The options market is already reflecting this shift, as the one-month risk reversal for USD/CAD has moved to favor puts, indicating a higher demand for downside protection.
This situation feels similar to what we observed in late 2023, when stronger-than-expected Canadian data caused a policy divergence with the U.S. and drove a significant rally in the loonie. Although the flash estimate for October GDP showed a contraction, the powerful upward revisions and the strong third-quarter print are the dominant factors for now. We see the path of least resistance for USD/CAD as being lower, targeting the 1.38 mark by the end of the year.
