The Canadian dollar strengthened to a near three-month high against its U.S. counterpart on Tuesday after mixed U.S. jobs data that could strengthen the case for a divergence in policy between the Bank of Canada and the Federal Reserve next year.
The loonie was trading 0.2% higher at 1.3743 per U.S. dollar, or 72.76 U.S. cents, after touching its strongest intraday level since September 17 at 1.3731.
“The bottom line is that the market has been overly bearish (on) CAD for too long, so the threshold of outperformance has been very low,” said Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets.
“Assuming a benign USMCA outcome, the Canadian economy is slowly expected to recover next year, and the next move from the Bank of Canada will likely be a hike.”
BoC Governor Tiff Macklem reiterated that the current policy setting of 2.25%, a three-year low, is at about the right level to keep inflation close to the central bank’s 2% target.
The United States-Mexico-Canada Agreement, a continental trade pact that has shielded much of Canada’s exports from U.S. tariffs, is up for joint review in 2026.
“In the US, the labor market is gradually cooling and more cuts are warranted from the Fed if this trajectory continues,” Ying said.
U.S. job growth rebounded more than expected in November after government-related spending cuts triggered the biggest drop in nonfarm payrolls in nearly five years in October. The U.S. dollar fell against a basket of major currencies, while the price of oil, one of Canada’s major exports, settled 2.7% lower at $55.27 a barrel as prospects for a Russia-Ukraine peace deal appeared to strengthen.
Canadian bond yields eased across the curve, tracking moves in U.S. Treasuries. The 10-year was down 2.1 basis points at 3.400%.