Stronger BoC rate-hike bets lift Canadian Dollar to one-month highs

• USD/CAD falls further as BoC rate-hike expectations build and the US Dollar weakens.
• The Loonie gains further support from firmer oil prices and easing political uncertainty in Alberta.
• The Greenback comes under pressure from lower US Treasury yields, but hawkish Fed expectations curb the downside.

Trading at around 1.4052 at the time of writing, USD/CAD remains close to one-month lows as its losing streak continues on Tuesday. Rising expectations of an interest rate increase by the Bank of Canada (BoC), alongside a weaker US Dollar (USD), are supporting the Canadian Dollar (CAD). Traders are also weighing contradictory reports on diplomatic efforts in the Middle East.

According to Israel’s Channel 12 News, the US has approved a proposal put to senior Iranian officials by Pakistan’s army chief, with Iran giving its preliminary agreement. Oil initially fell on the report before swiftly recovering. The reversal followed a Bloomberg report that a diplomat involved in US-Iran negotiations had challenged claims that an agreement was near, without denying that discussions remained under way.

With Canada a major crude exporter, firmer oil prices provide additional backing for its commodity-linked currency. Political uncertainty has also eased after Alberta, Canada’s major oil-producing province, rejected separation from the country.

A shift towards more hawkish expectations for Bank of Canada (BoC) interest rates is giving the currency further support. The BoC is now widely expected by traders to make its first rate increase of the year at the 28 October meeting. Over the weekend, Governor Tiff Macklem said that, with energy prices remaining high, the central bank would significantly raise its inflation forecasts in the forthcoming quarterly projections.

Canada’s annual inflation rate reached 3.1% in September, Monday’s figures showed, marking a four-month high as petrol prices increased. Even so, the result fell short of the market forecast of 3.2%.

Canadian bond yields have risen as expectations of a BoC rate increase have strengthened, reducing their gap with US yields. In recent weeks, higher US yields have been a significant drag on the Canadian Dollar.

US Treasury yields, by contrast, have pulled back from multi-year highs, putting pressure on the US Dollar. Investors sought government bonds last week amid concerns about AI-related investments. At around 5.08%, the benchmark 10-year US Treasury yield is below the roughly 5.36% seen earlier this month.

The prospect of a further Federal Reserve (Fed) rate increase before the end of the year could, however, limit declines in both the Greenback and Treasury yields. With September’s US inflation reports exceeding expectations, the case for additional tightening has strengthened as policymakers work to return inflation towards the central bank’s 2% target.

Despite this, traders anticipate that the Fed will leave rates unchanged at its 27–28 October meeting after raising them by 25 basis points (bps) in September. According to the CME FedWatch Tool, markets assign a 17% probability to an increase this month and a 92% probability to a rise in December.