Canada's Flat July GDP Adds to Rate-Cut Bets and Loonie Weakness

The Canadian economy experienced a flat month in July, with its gross domestic product (GDP) remaining unchanged at 0% on a month-on-month basis. This outcome aligns with market expectations and follows from the previous month's steady activity.

The zero reading indicates that neither expansion nor contraction occurred within the economy over the past month. Moving forward, markets and policymakers will be keen to monitor upcoming releases for insights into whether growth resumes or weakness takes hold.

A flat GDP in Canada typically puts downward pressure on the Canadian dollar against its US counterpart. Historically, stagnant growth constrains the Bank of Canada's ability to adopt a hawkish monetary policy stance, which can lead to widening bond yield differentials and a stronger USD/CAD exchange rate. We recommend traders consider buying USD/CAD call options to capitalize on this expected weakness in the Canadian dollar.

The stalling economic growth also supports the case for continued monetary easing by the Bank of Canada. Swap markets now price in a 75% probability of another 25-basis-point interest rate cut at the next policy meeting, indicating market anticipation of further rate reductions. To position for this potential pivot, traders may consider buying short-term Canadian interest rate futures to profit from falling yields.