Canada’s dollar weakened toward its worst closing level in almost five years and bond yields fell as a surging unemployment rate pushed traders to ramp up bets for a half-point interest-rate cut next week.

The loonie dropped some 0.9 per cent against its U.S. counterpart on Friday to $1.4147, which would mark the currency’s weakest closing level since April 2020. Two-year Canadian government bonds led a rally across the curve, with the yield on the policy-sensitive tenor falling as much as 15 basis points to 2.88 per cent, the lowest since September.

Swaps traders boosted their expectations that the Bank of Canada will lower rates by a half-point on Dec. 11. They’re now pricing a roughly 75 per cent chance of such a move, up from roughly coin-toss odds earlier this week.

“We now think the Bank of Canada will move more aggressively next week, cutting by 50 basis points and telegraphing a faster return to neutral in 2025,” wrote Karl Schamotta, chief market strategist at Corpay Currency Research in Toronto. “Canada’s job market remains seriously unbalanced, reflecting an economy that is struggling to generate private sector growth.”

Data released on Friday showed the country added 51,000 jobs in November, while the jobless rate surged to 6.8 per cent — the most since 2021.

“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 Bank of Canada officials in a note to clients Friday. At MUFG, strategists including Derek Halpenny recommended after the jobs data investors go long the U.S. dollar against the loonie with a target of 1.4550 — which would mark a drop for the loonie of more than 2.5 per cent from its current level.

The Canadian data came at the same time as a mixed November labour-market report in the United States, which led Treasuries to rally as traders boosted their bets on a Federal Reserve interest-rate reduction this month.

Speculative currency traders have amassed a sizable net short position on the Canadian dollar heading into the end of 2024.

Non-commercial players — which include the likes of asset managers and hedge funds — now own some 153,000 bearish contracts on the loonie worth about US$11 billion, according to the latest Commodity Futures Trading Commission data released earlier this week.

The Canadian dollar has slid more than six per cent so far this year, underperforming most Group-of-10 peers. That move has been matched by a widening of the spread between U.S. 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.

Bloomberg.com