TD Securities analysts report that Canada’s Q1 GDP and March output surprised sharply to the downside, confirming a technical recession and dampening expectations for 2026 rate hikes. Despite softer data and modest curve steepening, they see Canadian front-end rates as fairly valued and continues to expect USD/CAD to trade broadly sideways around current levels through Q2.

Technical recession but FX seen stable

"Q1 National Accounts surprised sharply to the downside with a 0.1% q/q contraction (TD/market: +1.5%) to leave Canada in its first technical recession since the pandemic. Domestic demand contracted by 0.4% q/q, while downward revisions to Q4 added to the dovish tone."

"Industry-level GDP for March was also softer than expected at -0.1% m/m (TD: +0.1%, market: 0.0%) on a large drag from natural resources that will unwind in April. The combination of softer GDP data for Q1 & March should help to quell speculation around 2026 rate hikes, although we continue to see a high bar for cuts."

"All told, the reaction in CAD fixed income was fairly measured, with Canada-US 2 and 5-year spreads settling ~4 bps tighter on the back of the data, and the curve modestly steepening. We see the front-end as close to fair at these levels, and think it makes sense to fade steepening ahead of next week's index extension."

"We continue to look for USD/CAD to remain range-bound around current levels through Q2 as two opposing forces remain at work. On one hand, upside pressure persists, driven by relative data and rate divergence between the U.S. and Canada. On the other hand, downside risks remain, as any positive geopolitical developments, would likely support broader risk sentiment and reinforce USD weakness, allowing USD/CAD to drift lower."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)