(Bloomberg) -- Canada’s dollar approached its lowest level this year and bond yields fell as surging unemployment led traders to ramp up bets on a half-point interest-rate cut next week.
The loonie dropped 1% against its US counterpart on Friday to C$1.4165, headed for its weakest closing level since April 2020 — and hovering just shy of 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%, the lowest since September.
Swaps traders boosted their expectations for an outsize Bank of Canada rate reduction on Dec. 11 to a roughly 80% chance, from a coin toss earlier this week. All of the nation’s big six banks now predict a 50-basis-point cut in borrowing costs.
Data released on Friday showed employers added 51,000 jobs in November, while the jobless rate climbed to 6.8% — the highest since 2021. That led economists at Scotiabank and Bank of Montreal to join Canada’s four other major lenders in predicting officials will bring the BOC’s overnight lending rate to 3.25% next week.
“The proportion of long-term unemployed people has increased along with the unemployment rate,” said 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 the firm’s expectation of a half-point reduction from BOC officials in a note to clients. At MUFG, strategists including Derek Halpenny recommended after the jobs data that investors go long the dollar against the loonie with a target of 1.4550 — which would mark a drop for the loonie of more than 2.5% from its current level.
“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,” said Shaun Osborne, Scotiabank’s chief foreign-exchange strategist.
What Bloomberg Economics Says...
“Details of Canada’s November labor 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 bps when they meet on Dec. 11.”
— Stuart Paul. To read more, click here
Speculative currency traders have amassed a sizable bearish position on the Canadian dollar heading into the end of 2024. Non-commercial traders are net short some 159,000 loonie contracts worth about $11.3 billion, according to Commodity Futures Trading Commission data as of Dec. 3.
The Canadian dollar has slid more than 6% so far this year, underperforming most Group-of-10 peers. That move has been matched by a widening of the spread between US and Canadian government bond yields. Two-year Treasuries now yield some 120 basis points more than their Canada counterparts, the most since 1997, according to data compiled by Bloomberg.
(Adds latest CFTC data, details on BOC forecasts.)
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