Canadian Dollar Weakness and Growing Bearish Sentiment: Assessing the Impact of Widening U.S.-Canada Employment Gaps and Speculative Positioning on CAD’s Trajectory

The Canadian dollar (CAD) has entered a period of pronounced vulnerability, driven by a confluence of deteriorating labor market fundamentals and intensifying speculative bearishness. Recent data underscores a widening employment gap between the U.S. and Canada, with the latter grappling with its steepest job losses in over three years. Meanwhile, speculative positioning reveals a record net-short exposure to CAD, amplifying downward pressure on the currency. This analysis examines how these dynamics are shaping CAD’s short-to-medium-term trajectory.

U.S.-Canada Employment Divergence: A Structural Weakness

Canada’s labor market has deteriorated sharply, with employment falling by 65.5 thousand in August 2025—the largest decline since January 2022—and the unemployment rate surging to 7.1%, the highest since August 2021 [1]. This contrasts with the U.S., where job losses, while notable, remain contained. The U.S. unemployment rate rose to 4.3% in August 2025, the highest since October 2021, but has remained within a 4.0%-4.2% range since May 2024 [3].

The divergence is exacerbated by U.S.-Canada trade tensions. New tariffs on Canadian steel and aluminum have triggered a 3.5% drop in Ontario’s manufacturing employment in Q2 2025 [3], a sector critical to Canada’s export-driven economy. These tariffs, coupled with weak domestic demand, have eroded confidence in Canada’s ability to sustain growth. The CAD’s muted response—trading at USD/CAD 1.3820—reflects broader uncertainty, as investors weigh the risks of prolonged economic stagnation against the Bank of Canada’s constrained policy options [1].

Speculative Positioning: A Canary in the Coal Mine

Speculative positioning data paints a stark picture of investor sentiment. The Commitment of Traders (COT) report reveals that large speculators and asset managers increased their net-short exposure to CAD futures by 8.2 thousand contracts in late August 2025, marking the second consecutive week of bearish bets [2]. This positions CAD as one of the most shorted currencies, with a net-short exposure of USD 7.6 billion [3].

The bearish stance is rooted in two key factors:
1. Tariff Uncertainty: Ongoing U.S. threats to expand tariffs on Canadian goods have heightened risk-off sentiment, prompting hedging activity by corporate and institutional investors.
2. Fundamental Weakness: Canada’s reliance on U.S. trade—nearly 75% of its exports—leaves it exposed to cross-border policy shifts, while domestic inflationary pressures limit the Bank of Canada’s ability to stimulate growth [2].

Short-to-Medium-Term Trajectory: A Perfect Storm?

The interplay of weak employment data and speculative positioning suggests CAD is vulnerable to further depreciation. A would illustrate the inverse relationship between speculative bets and currency strength.

Key risks for CAD include:
- Tariff Escalation: A 10% probability of additional U.S. tariffs on Canadian auto parts, per recent analyst estimates, could trigger a 5% drop in CAD.
- Policy Divergence: If the U.S. Federal Reserve pauses rate cuts while the Bank of Canada delays hikes to combat inflation, CAD could face sustained downward pressure.
- Self-Fulfilling Prophecies: Aggressive shorting may accelerate CAD’s decline, even absent new economic shocks, as leveraged funds unwind long positions.

However, a floor may emerge if the Bank of Canada intervenes via targeted stimulus or if trade negotiations yield a partial resolution. For now, investors should brace for volatility, with CAD likely to test key support levels at 1.3900 and 1.4100 in the coming months.

Conclusion

The Canadian dollar’s weakness is no longer a marginal concern but a systemic risk amplified by structural labor market challenges and speculative overreach. While the U.S. labor market’s relative resilience offers some respite, CAD’s trajectory hinges on resolving trade tensions and stabilizing domestic demand. Investors must remain vigilant, as the interplay of fundamentals and sentiment could drive CAD to multi-year lows if current trends persist.

**Source:[1] Canada and US post weak job numbers, Canadian dollar steady [https://www.marketpulse.com/news/canada-and-us-post-weak-job-numbers-canadian-dollar-steady/][2] USD Positioning Hints At Sentiment Extreme: COT report [https://www.forex.com/en-us/news-and-analysis/usd-positioning-hints-at-sentiment-extreme-cot-report/][3] COT report: Modest gold and silver longs fuel breakout ... [https://www.home.saxo/content/articles/commodities/cot-on-forex-and-commodities---1-sep-2025-01092025]