Insights 
VT 
In June, Canada’s GDP fell by 0.1%, missing the expected growth of 0.1%. The previous month’s GDP also recorded a 0.1% decline. For July, an advanced estimate predicts a GDP increase of 0.1%.
In the second quarter, the GDP fell at an annualised rate of 1.6%, compared to the expected 0.6% decrease. This is a drop from the previous figure of 2.2%, which was later revised to -2.0%.
Canadian Dollar Weakens
The Canadian dollar weakened following the announcement of the data. This result was attributed to declines in the export of goods and reduced business investment in machinery and equipment. These were partially offset by faster business inventory accumulation, higher household spending, and lower imports.
Following the data release, traders slightly increased their expectations for a rate cut by the Bank of Canada. The bets now indicate 27 basis points of easing by the end of the year, up from 24 basis points prior to the announcement.
The surprise contraction in the second quarter, combined with the significant downward revision for the first quarter, confirms that the Canadian economy is in a technical recession as of August 2025. This dramatically increases the pressure on the Bank of Canada to cut interest rates to support growth. The market’s current expectation of one 25 basis point cut by year-end now appears far too cautious.
Anticipating Rate Cuts
We should anticipate sustained weakness in the Canadian dollar. The most direct play is to use options to position for a stronger USD/CAD, perhaps buying out-of-the-money calls to gain leveraged exposure to a move higher. Looking back at the 2015 oil price shock, which also hit Canadian exports, the loonie weakened by over 20% against the US dollar in a similar environment of central bank easing.
This data provides a clear signal to bet on lower interest rates using instruments like CORRA overnight index swaps. Given that Canada’s unemployment rate has already ticked up to 6.5% in the latest jobs report, the central bank has a dual mandate problem that now heavily favors supporting employment. We should position for at least two rate cuts before the end of the year, exceeding current market pricing.
The decline in business investment is a worrying sign for corporate profits and the broader S&P/TSX index. We can buy put options on Canadian equity index ETFs as a way to profit from or hedge against a market downturn. This unexpected economic weakness is likely to increase market volatility, making option premiums more expensive soon.
The preliminary estimate of a tiny 0.1% rebound in July is not enough to offset the established negative trend. We will be closely watching the next inflation report for further signs of cooling from the recent 2.5% reading. Any data point showing disinflation will give the Bank of Canada the final justification it needs to begin an aggressive easing cycle.
