USD/CAD advances as the Canadian Dollar weakens amid expectations of a widening US-Canada interest-rate gap. The policy rate differential between the US and Canada is anticipated to expand in light of the Bank of Canada’s decision in September to maintain rates at 2.25%. The US Dollar may continue to strengthen as market expectations for a Federal Reserve rate hike in October increase. USD/CAD extends its gains for the sixth consecutive day, trading around 1.4150 during Asian hours on Monday. The pair appreciates as the Canadian Dollar is declining under pressure from expectations of a widening interest-rate differential between the United States and Canada. This gap is anticipated to widen following the Bank of Canada maintaining its key policy rate at 2.25% during its September meeting.
Strategists observe that “wider US-Canada spreads have been a major headwind for the CAD over the past couple of weeks,” leaving the currency under pressure against the USD and lagging most of its G10 peers. However, they add that “the move feels somewhat stretched,” arguing that there is “limited scope for further tightening in Fed expectations while the BoC feels somewhat underpriced,” suggesting the recent underperformance of the Canadian Dollar may be overdone. However, elevated oil prices persist in exerting upward pressure on Canadian inflation. Market participants are seeking new catalysts while attentively observing geopolitical dynamics in the Middle East.
Market sentiment continues to be influenced by developments in the region following US President Donald Trump’s dismissal of Iran’s recent proposal to reopen the Strait of Hormuz. He remarked that Tehran had overextended its position, although he indicated that negotiations are anticipated to recommence this week. Furthermore, President Trump conveyed optimism regarding the swift resolution of the conflict with Iran, while also maintaining the option for further military actions prior to the midterm elections. The Federal Reserve raised its federal funds target range at its latest meeting, reinforcing the US Dollar’s advantage over the Canadian Dollar. Money markets currently reflect a 65.9% probability of an additional benchmark rate increase at the upcoming October Federal Reserve meeting, a notable rise from 57.6% just one week prior and a mere 9.4% a month earlier.
Market participants are shifting their attention to significant economic indicators scheduled for release this week. Market focus is directed toward the impending US employment figures and the Federal Reserve’s favoured inflation measure to assess the prospective path of monetary policy. Last week, Cleveland Fed President Beth Hammack cautioned against permitting the public to normalise elevated prices. Echoing this sentiment, Philadelphia Fed President Anna Paulson indicated that some additional tightening might be appropriate.
