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

• Can USD/CAD halt its slide as BoC rate-hike expectations and US Dollar weakness weigh on the pair?
• The Loonie finds further support as Oil prices rise and political uncertainty in Alberta eases.
• The Greenback faces pressure from declining US Treasury yields, but hawkish Fed expectations curb further downside.

Pressure on USD/CAD persists on Tuesday, with the Canadian Dollar (CAD) benefiting from US Dollar (USD) weakness and mounting expectations that the Bank of Canada (BoC) will raise interest rates. The pair is trading around 1.4052 at the time of writing, close to one-month lows. Traders are also weighing contradictory reports on diplomatic efforts in the Middle East.

A proposal put forward by Pakistan’s army chief to senior Iranian officials has secured American approval and preliminary agreement from Iran, according to Israel’s Channel 12 News. The report initially sent Oil prices lower. That decline was swiftly reversed, however, after Bloomberg reported that a diplomat involved in US-Iran negotiations had challenged claims that an agreement was imminent, without denying that discussions remained under way.

As Canada is a major crude exporter, rising Oil prices provide an additional lift to its commodity-linked currency. Political uncertainty has also eased after Alberta, the country’s major Oil-producing province, rejected separation from Canada.

A shift towards more hawkish expectations for Bank of Canada (BoC) interest rates is providing further support to the currency. The BoC is now widely expected by traders to announce its first rate increase of the year at the October 28 meeting. Speaking over the weekend, Governor Tiff Macklem said that persistently elevated energy prices would prompt the central bank to lift its inflation forecasts significantly in the forthcoming quarterly projections.

Higher gasoline prices drove Canada’s annual inflation rate to a four-month high of 3.1% in September, figures published on Monday showed. Even so, the reading fell short of the 3.2% expected by the market.

Canadian bond yields have risen as expectations of a BoC rate increase build, reducing their gap with US yields. In recent weeks, higher yields in the US have been a major factor weighing on the Canadian Dollar.

The US Dollar has also come under pressure as US Treasury yields pull back from multi-year highs. Concerns about AI-related investments drove investors towards government bonds last week. At around 5.08%, the benchmark 10-year US Treasury yield is below the roughly 5.36% seen earlier this month.

Further declines in both the Greenback and Treasury yields could, however, be limited by expectations that the Federal Reserve (Fed) will raise rates again before year-end. With policymakers seeking to return inflation towards the central bank’s 2% target, stronger-than-expected US inflation reports for September bolster the argument for additional tightening.

Despite this, traders anticipate no change in Fed rates at the October 27-28 meeting, after September’s increase of 25 basis points (bps). According to the CME FedWatch Tool, markets assign a 17% probability to a rate rise this month and a 92% probability to an increase in December.