Unemployment rise fuels expectations of a half-point rate cut, pushing bond yields and loonie
Canada’s dollar neared its lowest level of the year, while bond yields dropped amid rising unemployment and growing expectations of a significant interest rate cut by the Bank of Canada (BOC) next week.
According to BNN Bloomberg, the loonie fell 1 percent against the US dollar on Friday, reaching $1.4165 — the weakest closing level since April 2020 and close to its lowest point this year.
Two-year Canadian government bonds, a key indicator of monetary policy expectations, led a rally across maturities. The yield on the two-year bond fell 15 basis points to 2.89 percent, marking its lowest level since September.
Swaps traders increased their predictions for a 50-basis-point rate cut on December 11 to an 80 percent likelihood, up from a roughly 50 percent chance earlier this week.
All of Canada’s major banks now forecast a half-point reduction in the BoC’s overnight lending rate.
Economists at Scotiabank and Bank of Montreal joined other major lenders in projecting the rate will drop to 3.25 percent next week.
Data released on Friday showed that Canadian employers added 51,000 jobs in November, but the unemployment rate rose to 6.8 percent — the highest level since 2021.
The proportion of long-term unemployed individuals also increased, further underscoring challenges in the labour market.
Sarah Ying, head of currency strategy at CIBC Capital Markets, reiterated her expectation for a 50-basis-point rate cut, noting, “The proportion of long-term unemployed people has increased along with the unemployment rate.”
Citigroup economist Veronica Clark reaffirmed the firm’s view of a half-point rate cut in a note to clients.
Strategists at MUFG, including Derek Halpenny, recommended investors take a long position on the US dollar against the loonie, targeting an exchange rate of 1.4550.
This would represent a 2.5 percent drop for the loonie from its current value.
Shaun Osborne, Scotiabank’s chief foreign-exchange strategist, observed, “The Bank of Canada’s policy outlook is weighing on the Canadian dollar, and from a technical point-of-view, there’s little to suggest the currency will not keep sliding in the near-term.”
Bloomberg Economics described Canada’s November labour market data as “far more grim than the headline pace of hiring suggests.”
While the addition of jobs in cyclically sensitive industries may slow the pace of rate cuts, Bloomberg Economics forecasts a 25-basis-point reduction at the December 11 meeting.
Speculative traders have increased bearish positions on the loonie. Non-commercial traders held net short positions worth $11.3bn as of December 3, according to the Commodity Futures Trading Commission.
The Canadian dollar has declined more than 6 percent this year, making it one of the worst-performing currencies among Group-of-10 peers.
The spread between US and Canadian two-year government bond yields widened to 120 basis points, the largest gap since 1997, further pressuring the loonie.
