Bloomberg’s June economic survey, released Friday, shows Canada’s 2026 GDP growth consensus has been cut to 0.7% from 1.1%, leaving the outlook trailing US growth above 2%. The downgrade follows weaker-than-expected activity early in the year, reinforcing a picture of underperformance heading into 2026.
That softer backdrop has offset the recent inflation pick-up and helped the Bank of Canada avoid further tightening. With core price pressures described as contained and energy risks easing, the survey points to inflation moving back towards 2%, and a policy rate expected to remain on hold into 2027. On the near-term policy path, all but three of 19 forecasters see the rate unchanged this year. The article was produced using an AI tool and reviewed by an editor.
Widening Economic Divergence and USD/CAD Implications
Given the updated 2026 Canadian GDP forecast of only 0.7%, we are focused on the widening economic gap with the U.S., which is still growing above 2%. This reinforces the expectation that the Bank of Canada will remain on hold while the Federal Reserve has more flexibility. The current USD/CAD exchange rate hovering near 1.3800 reflects this, but we see room for it to move higher.
The Bank of Canada’s dovish stance, set against a more robust U.S. economy, clearly weakens the case for holding Canadian dollars. We are therefore positioning for a higher USD/CAD exchange rate, likely testing the 1.4000 level in the coming weeks. History shows that during similar periods of economic divergence, like in 2017-2018, the pair saw significant upward movement.
Domestic Rate Stability and Equity Market Underperformance
The consensus for a sidelined Bank of Canada suggests a period of low volatility in our domestic interest rates. We see an opportunity in derivatives that profit from this stability, essentially betting that Canadian rates will remain anchored. The yield on the Canadian 2-year government bond is already trading at 3.95%, a significant 60 basis points below its U.S. counterpart, and we expect this gap to widen.
We believe the sluggish growth outlook will weigh on Canadian corporate earnings relative to their U.S. peers. This points to the S&P/TSX 60 Index continuing to underperform the S&P 500. We are exploring protective put options on TSX-tracking ETFs to capitalize on this divergence, which has already seen the TSX lag its U.S. counterpart by over 4% this year.
