Rising unemployment and bond rallies drive speculation on Bank of Canada’s next rate move
Canada’s dollar approached its weakest level this year, and bond yields declined as unemployment surged, prompting traders to increase bets on a half-point interest rate cut next week, as per BNN Bloomberg.
On Friday, the loonie dropped 1 percent against the US dollar to $1.4165, nearing its lowest level since April 2020 and hovering close to its weakest level this year.
Two-year Canadian government bonds led a rally across maturities, with the yield on the policy-sensitive tenor falling 15 basis points to 2.89 percent, the lowest since September.
Swaps traders raised their expectations for an outsized interest rate reduction from the Bank of Canada (BoC) on December 11 to roughly an 80 percent chance, compared to a 50-50 probability earlier this week.
All six of Canada’s largest banks now predict a 50-basis-point cut in borrowing costs.
Data released on Friday showed Canadian employers added 51,000 jobs in November, while the unemployment rate climbed to 6.8 percent — the highest level since 2021.
Economists at Scotiabank and Bank of Montreal joined the country’s four other major lenders in forecasting a reduction in the overnight lending rate to 3.25 percent next week.
“The proportion of long-term unemployed people has increased along with the unemployment rate,” stated Sarah Ying, head of currency strategy at CIBC Capital Markets in Toronto. “We continue to call for a 50-basis-point rate cut for December.”
Citigroup economist Veronica Clark reiterated her firm’s expectation of a half-point reduction in a note to clients.
Following the jobs data, MUFG strategists, including Derek Halpenny, recommended investors take a long position on the US dollar against the loonie with a target of 1.4550.
This target indicates a potential 2.5 percent drop in the Canadian dollar’s value from its current level.
Shaun Osborne, chief foreign-exchange strategist at Scotiabank, noted, “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.”
According to Bloomberg Economics, “Details of Canada’s November labour survey are far more grim than the headline pace of hiring suggests, and will keep the BoC cutting rates. But with jobs still being added — in more cyclically sensitive industries — and inflation ticking up, we think policymakers will slow the easing pace, lowering the overnight rate target by just 25 basis points when they meet on December 11.”
Non-commercial traders have accumulated a net short position of approximately 159,000 Canadian dollar contracts worth $11.3bn, as of December 3, based on Commodity Futures Trading Commission data.
The Canadian dollar has depreciated more than 6 percent this year, underperforming most Group-of-10 currencies. This decline aligns with a widening spread between US and Canadian government bond yields.
Two-year US Treasuries now yield 120 basis points more than their Canadian counterparts, marking the widest gap since 1997, according to Bloomberg data.
