Canadian Dollar Resilience Amid Jobs Surge: Implications for FX and Debt Markets

Assessing the Sustainability of CAD's Rebound and Its Impact on Carry Trade Strategies and Bond Yields

The Canadian dollar (CAD) has shown a modest rebound in late 2025, driven by a September jobs report that added 60,400 positions-surpassing economist forecasts-despite lingering economic headwinds. However, the sustainability of this rebound remains uncertain, as mixed labor market data, trade tensions, and monetary policy shifts create a complex landscape for foreign exchange (FX) and debt markets. This analysis evaluates the interplay between CAD resilience, bond yields, and carry trade strategies, offering insights for investors navigating these dynamics.

Jobs Data and Mixed Signals for CAD

The September 2025 jobs report revealed a net gain of 60,400 jobs, primarily fueled by public-sector hiring and manufacturing recovery, according to a Bloomberg report. This contrasted sharply with August's contraction of 66,000 jobs and a rise in the unemployment rate to 7.1%, the highest since 2016, as reported by Trading Economics. While the September data initially bolstered CAD, the persistent 7.1% unemployment rate and three-month job loss of 45,900 positions underscored underlying fragility noted in the Bloomberg coverage.

The Bank of Canada (BOC) responded to these mixed signals by cutting interest rates by 25 basis points in early September, aligning with market expectations of dovish policy, according to a Considerable analysis. This move weakened the CAD against the U.S. dollar, pushing USD/CAD to 1.3840, as argued in a PIMCO note. The divergence between short-term job gains and long-term labor market softness highlights a critical question: Can CAD's rebound withstand ongoing trade war pressures and structural economic challenges?

Bond Yields and Monetary Policy Dynamics

Canadian 10-year government bond yields fell to 3.15% in September 2025 following the BOC's rate cut, down from 3.47% in August, according to Trading Economics. This decline reflected investor expectations of further monetary easing, as the BOC signaled a "durable campaign of rate reductions" to address inflation and growth concerns, a dynamic also highlighted by Trading Economics. The yield curve flattened, with 2-year yields dropping 17 basis points and 10-year yields declining 21 basis points, indicating heightened demand for long-term Canadian debt amid policy uncertainty-a trend covered in the Bloomberg report.

The bond market's reaction was amplified by global factors, including U.S. fiscal expansion and trade tensions, which reduced the appeal of Canadian bonds relative to Treasuries, a point explored in the PIMCO analysis. However, Canada's AAA sovereign rating and fiscal discipline have positioned its debt as a relative safe haven, attracting foreign investors despite the yield gap, as PIMCO also observes.

Carry Trade Adjustments and CAD Positioning

Carry trade strategies involving CAD have evolved in response to the BOC's easing cycle and USD/CAD volatility. With CAD trading near five-year lows and net short positions at record levels, analysts argue that extreme bearish sentiment may precede a reversal, according to Bloomberg's reporting. This has prompted some investors to hedge U.S. dollar exposure and rotate into CAD positions, betting on a potential rebound, as discussed in the Considerable analysis.

However, the sustainability of such strategies hinges on the BOC's ability to balance rate cuts with inflation control. A further 25-basis-point cut in December 2025, as anticipated by markets per the Considerable piece, could widen the interest rate differential with the U.S. Federal Reserve, potentially weakening CAD further. Conversely, a slowdown in U.S. economic growth or tariff delays might limit USD gains, creating asymmetric opportunities for CAD carry trades, as outlined by Considerable.

Sustainability of CAD's Rebound: Key Considerations

The CAD's resilience faces three critical tests:
1. Trade War Mitigation: The BOC's removal of reciprocal tariffs has eased inflationary pressures, but ongoing U.S.-Canada trade tensions could disrupt manufacturing and export sectors, a vulnerability noted in the PIMCO analysis.
2. Labor Market Stability: While September's job gains were encouraging, the three-month job loss of 45,900 positions suggests volatility. A sustained recovery would require stronger private-sector hiring and immigration-driven demand, per the Bloomberg report.
3. Monetary Policy Coordination: The BOC's dovish stance must align with global easing trends to avoid CAD depreciation. A coordinated rate-cut cycle with the Fed could stabilize USD/CAD, but divergent policies may reignite volatility, as the Considerable analysis discusses.

For investors, the CAD's trajectory underscores the importance of hedging against trade war risks while capitalizing on bond market rallies. Canadian bonds, with their strong fiscal fundamentals, offer a compelling case for long-term investors, even as short-term FX volatility persists.

Conclusion

The Canadian dollar's recent rebound, driven by a September jobs surge and BOC rate cuts, reflects a fragile balance between optimism and caution. While bond yields have declined in response to accommodative policy, carry trade strategies remain sensitive to trade tensions and interest rate differentials. For CAD to sustain its resilience, policymakers must navigate trade disputes and labor market challenges while maintaining inflationary discipline. Investors should prioritize diversified portfolios that hedge FX risks while leveraging Canada's bond market as a stable, high-quality asset class.