Canadian Dollar climbs to one-month highs as BoC rate-hike bets strengthen

• USD/CAD extends losses as BoC rate-hike bets and a softer US Dollar weigh.
• Higher Oil prices and reduced political uncertainty in Alberta offer additional support to the Loonie.
• Falling US Treasury yields weigh on the Greenback, although hawkish Fed expectations limit further losses.

USD/CAD extends its losing streak on Tuesday as the Canadian Dollar (CAD) draws support from a softer US Dollar (USD) and growing expectations of a Bank of Canada (BoC) interest rate hike. Meanwhile, traders assess conflicting headlines surrounding diplomatic efforts in the Middle East. At the time of writing, USD/CAD trades around 1.4052, near one-month lows.

Israel’s Channel 12 News reported that a proposal presented by Pakistan’s army chief to senior Iranian officials has received American approval and preliminary agreement from Iran. Oil prices initially declined following the news but quickly reversed course after Bloomberg reported that a diplomat involved in US-Iran negotiations disputed suggestions that a deal was close, while not denying that talks were continuing.

Higher Oil prices also lend some support to the commodity-linked Canadian Dollar, given Canada’s status as a major crude exporter. Meanwhile, Alberta, Canada’s major Oil-producing province, has rejected separation from the country, removing a source of political uncertainty.

Hawkish repricing of Bank of Canada (BoC) interest rate expectations also underpins the currency. Traders now widely expect the BoC to deliver its first rate hike of the year at its October 28 meeting. Governor Tiff Macklem said over the weekend that persistently high energy prices would lead the central bank to raise its inflation forecasts significantly in its upcoming quarterly projections.

Data released on Monday showed Canada’s annual inflation rate rose to 3.1% in September, its highest level in four months, driven by higher gasoline prices. The reading came in below market expectations of 3.2%.

Expectations of a BoC rate hike have pushed Canadian bond yields higher, narrowing the gap with their US counterparts. Higher US yields have been a key source of pressure on the Canadian Dollar in recent weeks.

Meanwhile, US Treasury yields have retreated from multi-year highs as concerns over AI-related investments prompted investors to move into government bonds last week, weighing on the US Dollar. The benchmark 10-year US Treasury yield stands near 5.08%, down from around 5.36% earlier this month.

However, expectations of another Federal Reserve (Fed) rate hike before year-end could cushion the downside in the Greenback and Treasury yields. Hotter-than-expected September US inflation reports reinforce the case for further tightening as policymakers seek to bring inflation back toward the central bank’s 2% target.

Traders nevertheless expect the Fed to pause at its October 27-28 meeting following September’s 25-basis-point (bps) increase. The CME FedWatch Tool shows markets pricing in a 17% chance of a rate hike this month and a 92% chance of an increase in December.