The Bank of Canada may cut interest rates by 50 basis points.

The Canadian dollar slightly weakened over the past week as investors received labor market data that surpassed expectations ahead of next week's monetary policy decision meeting. A sharp increase in unemployment, aligning with concerns from the Bank of Canada (BoC) regarding a weakening labor market, has heightened expectations of a 50 basis point rate cut. However, concerns persist about Canada’s economy due to impending 25% import tariff hikes announced by U.S. President-elect Donald Trump, which have reduced confidence in Canada's economy given its reliance on U.S. demand for energy and automotive products.

Canada’s GDP grew by 0.3% quarter-on-quarter in Q3 2024, slowing from the 0.5% growth recorded in the previous quarter, consistent with market forecasts. Economic growth was driven primarily by household consumption, particularly the purchase of vehicles such as trucks, vans, and personal cars. Additionally, government spending grew sharply, increasing by more than 1.1%, spurred by elevated expenditures across all levels of government. However, exports of goods and services contracted by 0.3%, directly dampening Canada’s GDP growth.

Canada posted a trade deficit of CAD 0.92 billion in October, narrowing from a deficit of CAD 1.26 billion in the previous month. This marks the eighth consecutive month of trade deficits. The October improvement was supported by exports growing faster than imports. Imports increased by just 0.5% to CAD 65.1 billion, driven largely by a 46.1% rise in metal ore imports and a 6.2% increase in energy imports.

On the export side, Canada’s exports rose by 1.1% to CAD 64.2 billion, marking the first increase after three consecutive months of declines. However, this growth was concentrated in only 3 out of 11 product categories. The largest increase came from exports of metal and mineral products, which surged by 10.6% in October, particularly unprocessed gold, silver, and platinum. Pharmaceutical product exports also rebounded significantly, growing by 36.8% after two months of declines, mainly due to increased exports of medications to the United States.

Unemployment in Canada rose to 6.8% in November, up from 6.5% the previous month, exceeding the forecast of 6.6% and marking the highest rate since 2021. This increase aligns with the BoC's concerns about a softening labor market. The number of unemployed individuals surged by 87,300 to 1,516,300, while employment rose by only 50,500 positions to 20,647,400. Notably, over 50% of the rise in unemployment occurred among youth under 24, while an additional 25% was among older adults. On the employment side, most new positions were in the service sector, including wholesale and retail trade, which added 39,000 jobs, and the food and accommodation industry, which gained 15,000 positions.