Hawkish Fed expectations keep US Dollar steady as Canadian Dollar holds its ground

• Stronger US inflation figures and hawkish Fed remarks lift expectations of a December Fed rate rise, potentially supporting gains in USD/CAD.
• A sharp increase in OPEC+ production and reduced US-Iran tensions push crude prices lower, putting pressure on the Canadian Dollar.
• Canadian inflation climbing to 3.1% strengthens expectations of a Bank of Canada rate rise, cushioning the CAD against downward pressure.

After two successive daily advances, USD/CAD trades little changed near 1.4250 in Thursday’s Asian session. The pause may prove temporary: an increasingly hawkish outlook for Federal Reserve (Fed) policy could support the US Dollar (USD), allowing the pair to extend its gains.

US Consumer Price Index (CPI) inflation exceeded expectations, prompting traders to increase their bets on a December interest rate rise. Those expectations gained particular support from Fed Governor Christopher Waller’s comments earlier this week: he would favour a quarter-point increase, or even a half-point rise should inflation deteriorate. The CME FedWatch Tool now puts market-implied odds of a December rate rise at around 87%, with a nearly 13% probability assigned to a larger 50 basis point increase.

TD Securities sees further potential for the US Dollar to strengthen against selected major currencies. Its analysts note that “across global major currencies, we see room for the USD to rally selectively against CAD and KRW in the near-term.” Canada’s “rising unemployment rate amid falling wage growth rate” weakens the argument for tighter monetary policy, underpinning their view that “diverging employment data releases will likely keep USDCAD supported above 1.40,”. They believe this environment “reduces the market pricing of a December BoC rate hike relative to the Fed,” keeping the Canadian Dollar exposed to weakness and supporting USDCAD at higher levels.

Weakness in crude prices could provide another source of support for USD/CAD by weighing on the commodity-linked Canadian Dollar (CAD). Alongside an expansion in supply, signs that the US and Iran are avoiding further escalation have contributed to oil’s retreat.

OPEC’s monthly report, published on Wednesday, showed that OPEC+ crude output rose by roughly 2.04 million barrels per day in October, taking production to 41.23 million barrels per day. Saudi Arabia accounted for much of the increase.

Canadian annual inflation rose slightly to 3.1% in September from 3.0% in August, its highest level since May’s 3.2%. Expectations of a possible Bank of Canada (BoC) rate rise are consequently providing some underlying support for the CAD. Separately, the Democratic Party’s victory in the US mid-term elections may alleviate trade-related pressures on Canadian economic growth.