The Bank of Canada’s latest sentiment survey indicates an improvement in Canadian business sentiment, though growth expectations remain muted. Many firms cite US tariffs as a barrier to active trade, affecting growth.

The Q3 Business Outlook Survey shows a subtle improvement but overall intentions remain subdued. The Business Service Indicator shifted to -2.28 from -2.40 in Q2, while future sales balance improved to 0.0 from -6.0.

Businesses And Consumer Expectations

Sales have declined for 27% of firms over the past year, up from 24% in Q2, and 33% of firms anticipate a recession, an increase from 28%. Meanwhile, 18% foresee inflation above 3% for the next two years, down from 23%.

In terms of costs, 35% of firms expect reduced labour costs, with 14% expecting increases. According to the Q3 Survey of Consumers, 64.1% of Canadians anticipate a recession, a slight decrease from 64.4%.

Consumer expectations for five-year inflation have increased to 3.67% from 3.45% in Q2. The survey provides a snapshot of the current economic sentiment among businesses and consumers amid existing trade and economic challenges.

The latest Bank of Canada survey paints a picture of a split economy, which creates opportunities for us in the derivative markets. While business sentiment shows some improvement, one-third of firms now expect a recession within a year, and consumer worries remain high. This puts the central bank in a difficult position, likely keeping them on hold for now.

Positioning And Strategy

We see the inflation data as a key point of tension that will drive volatility in the coming weeks. Consumer expectations for inflation over the next five years are rising, hitting 3.67%, which the Bank of Canada cannot ignore. This aligns with the latest Statistics Canada report for September 2025, which showed the annual CPI rate was a sticky 3.4%, well above the 2% target.

This environment of stubborn inflation mixed with soft sales growth is a headwind for the Canadian dollar. With US trade tariffs still impacting export outlooks, we can expect the CAD to struggle, especially if upcoming Canadian jobs data shows weakness. Looking back at the period from late 2023 to early 2024, similar conditions led to a prolonged period of CAD underperformance against the US dollar.

For our positioning, this suggests buying put options on the CAD/JPY pair, as a risk-off sentiment would likely strengthen the yen while Canadian economic fears weigh on the loonie. It also makes sense to consider selling out-of-the-money call options on USD/CAD, collecting premium on the view that the pair is unlikely to break significantly lower. This strategy lets us profit from the expected range-bound, slightly upward movement in the currency pair.

In the interest rate market, the conflicting data points to uncertainty around the Bank of Canada’s next move. We can exploit this by purchasing straddles on the futures for the 2-year Government of Canada bond yield ahead of the next policy meeting. This position will be profitable whether the bank surprises with a hawkish hold due to inflation or a dovish pivot due to recession fears.

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