Insights 
VT 
In July 2025, Canadian building permits dropped by 0.1%, contrary to the anticipated increase of 4.0%. The previous month’s figure stood at -9.0%, and permits were down 8.2% year-on-year. Residential construction intentions increased by $268.3 million to reach $7.3 billion in July. Meanwhile, non-residential building permits saw a decrease of $279.2 million, totalling $4.6 billion.
A separate report on capacity utilisation shows that in Q2, utilisation was at 79.3%, slightly above the expected 78.8%. In Q1, this figure was 80.1%. Manufacturing capacity utilisation stood at 79.3%, lower than the previous 79.9%.
Signs Of A Cooling Economy
This new data, particularly the major miss on building permits, suggests the Canadian economy is cooling faster than anticipated. The market expected a 4.0% rise, but instead saw a slight decline, which points to weakening future investment and construction. This should make us question the odds of any further interest rate hikes from the Bank of Canada.
Given these signs of a slowdown, we should consider positioning for lower Canadian interest rates in the months ahead. Derivatives like Bankers’ Acceptance futures (BAX) or options on Canadian Government Bond futures could become attractive plays. This data reinforces the narrative that the Bank of Canada’s next move is more likely a cut than a hike.
Just last week, on September 5, 2025, the Bank of Canada held its policy rate steady at 4.5%, citing a better balance between supply and demand. However, with the latest August 2025 inflation report showing CPI still at a sticky 3.1%, this new weak activity data complicates their policy decisions. We remember the slowdown during the rate pause of late 2023, and this feels like a similar setup.
Impact On The Canadian Dollar
A more hesitant Bank of Canada typically puts pressure on the Canadian dollar. We should look at buying put options on the CAD or call options on the USD/CAD currency pair. If the market begins to price in rate cuts for early 2026, the Canadian dollar could see significant weakness against the US dollar.
The weakness is also sector-specific, with non-residential permits falling and manufacturing capacity utilization ticking down from the first quarter. This is a negative signal for industrial and materials companies on the Toronto Stock Exchange. We could hedge this potential downturn by buying put options on ETFs that track these sectors.
