Canadian GDP rose 0.3% in May and an advance estimate pointed to a further 0.2% increase in June, suggesting a firmer second-quarter recovery after growth stalled over the winter. The uptick was described as broad-based across sectors. On the combined monthly data, Royal Bank of Canada economists estimated Q2 annualised growth at 3.4%, which compared with their 2.2% forecast.
The outlook was framed as facing downside risks from escalating trade tensions and new US tariff announcements, with pressure expected to fall most heavily on targeted industries. Even so, the data were presented as consistent with stabilisation in labour markets. The economists said they still expected output to improve on a per-person and per-worker basis through the year.
Derivative Strategies and Currency Outlook
We suggest that derivative traders look closely at Canadian dollar (CAD) call options as the economy shows unexpected strength. With Q2 annualized growth tracking at 3.4%, well above previous estimates, the Bank of Canada may delay further interest rate cuts. This economic resilience makes the CAD undervalued, especially against a basket of weaker global currencies.
To hedge against the escalating trade tensions and threatened U.S. tariffs, we recommend buying short-term put options on export-heavy Canadian equities, particularly in the manufacturing and steel sectors. Historically, during the 2018 tariff disputes, Canadian industrial stock indices fell by over 8% in the weeks following tariff announcements. Utilizing protective puts will allow us to capture the upside of the domestic rebound while capping downside risks from trade wars.
Bond Market Implications
Interest rate swap markets are currently underpricing the likelihood of a hawkish pause by the central bank. We see a strong opportunity in shorting Canadian 2-year government bond futures, as yields are likely to rise when the market adjusts to this stronger growth data. With inflation pressures stabilizing but growth surging, bond yields have room to move upward by 15 to 25 basis points in the coming weeks.
