Canadian Jobs Surge Lifts Loonie to 2-Month High, Pushes Rate Hike Bets

Canada's labor market continued to surprise economists in November, with the economy adding 53,600 jobs—well above expectations of a net loss of 2,500. The unemployment rate dropped to 6.5%, the lowest since July 2024, as part-time and private-sector hiring drove the gains. The three-month trend showed an impressive 180,000 total job additions, signaling resilience in the face of ongoing US-Canada trade tensions.

The strong employment data pushed the Canadian dollar to a two-month high, with USD/CAD falling to 1.3889 as traders adjusted to the improved labor market outlook. The loonie's jump reflected growing expectations that the Bank of Canada will maintain its current interest rate of 2.25% for the foreseeable future. Futures markets now indicate a potential rate hike by October 2026, reversing earlier bets on additional easing.

Market reactions were swift and clear. Canadian government bond yields surged, with the five-year note jumping nearly 20 basis points to 3.01%, the largest move since March 2023. The S&P/TSX Composite Index dipped 0.5% as investors reassessed risk assets, with mining and energy shares underperforming. Aecon Group was a notable exception, rising nearly 5% amid infrastructure optimism.

Why the Strong Jobs Growth?

Despite ongoing trade disputes with the United States, Canada's job market has shown surprising strength. The November gains were concentrated in part-time positions and the private sector, particularly in health care and social assistance, where employment rose by 46,000. The shrinking labor force also played a role in the declining unemployment rate. With the participation rate falling to 65.1%, fewer people were actively seeking work, reducing the pressure on the jobless rate.

The drop in uncertainty, both around the US-Canada trade relationship and the CUSMA (US-Mexico-Canada Agreement) review, may have encouraged employers to ramp up hiring outside the most vulnerable sectors. Charles St-Arnaud of Servus Credit Union noted that the "reduction in uncertainty in recent months may be helping an improvement in the economy." Still, he and others caution that the looming CUSMA review could cloud the outlook according to analysts.

What Analysts Are Watching

While the immediate job market data has boosted investor confidence, economists remain cautious about the long-term outlook. Doug Porter of the Bank of Montreal called the market's expectation of a Bank of Canada rate hike "premature," noting that the central bank is likely to keep rates on hold for an extended period. The Canadian economy still faces headwinds from US tariffs and the uncertainty of the CUSMA review, which has begun in Washington.

The upcoming rate decisions by both the Bank of Canada and the Federal Reserve will be critical for the loonie's path. The Bank of Canada is widely expected to hold at 2.25% next week, while the Fed is seen delivering a 25-basis-point cut by December 10. A narrowing rate differential between the two central banks typically supports the Canadian dollar. However, the uncertainty around the Fed's next move and potential hawkish surprises from the BoC could further lift CAD.

Risks to the Outlook

Despite the strong job gains, underlying economic fundamentals remain mixed. The GDP report for the third quarter showed a faster-than-expected expansion of 2.6% annualized, but this was driven largely by inventory investment and government spending. Final domestic demand fell, household consumption dropped, and business investment stagnated, signaling structural weaknesses. The Bank of Canada has already flagged these concerns, with Governor Tiff Macklem stating that rates are "about the right level" to support the economy while containing inflation.

The trade tensions with the US also continue to weigh on specific sectors. Algoma Steel, for example, announced plans to cut 40% of its workforce after US tariffs slashed sales. Meanwhile, a property developer in British Columbia faced financing challenges after a court granted Indigenous rights over a key development site. These developments highlight the uneven impact of trade and regulatory shifts on the Canadian economy.

What This Means for Investors

Investors are now recalibrating their expectations for the Canadian economy and central bank policy. While the Bank of Canada appears unlikely to raise rates anytime soon, the possibility of a hike by the end of 2026 is becoming more tangible. This shift has already pushed the Canadian dollar higher and pushed bond yields up sharply across the curve according to market analysis.

For equity investors, the strong job market may provide a tailwind for financial stocks. Laurentian Bank of Canada is in the midst of a significant transformation, having agreed to be split between Fairstone Bank and National Bank of Canada in a $1.9 billion deal. The transaction, expected to close by mid-2026, has boosted Laurentian's stock by over 18% since the announcement according to financial reports. National Bank of Canada, which is acquiring Laurentian's retail and small business segments, is also seeing its shares rise as it expands its footprint in Quebec.

As the Canadian economy continues to navigate trade tensions and regulatory uncertainty, the labor market has emerged as a key area of resilience. The coming months will test whether this strength is sustained or if structural headwinds will begin to take a larger toll.