USD/CAD stalls near 1.40 as BoC rate verdict looms
USD/CAD is treading water close to the 1.40 mark as traders await rate announcements from the Bank of Canada and the US Federal Reserve. Economists point to narrowing cross-border yield gaps and growing odds of a BoC hike as the main forces at play.
Economists at National Bank of Canada, Taylor Schleich and Ethan Currie, argue that stubbornly high crude prices combined with a stronger growth picture now build the case for the central bank to lift borrowing costs for the first time since July 2023. In their view, soft economic conditions and tame core inflation had given policymakers room to wait through most of this year, but officials have grown visibly concerned that pricier oil could spread inflationary pressure more broadly across the economy.
According to the pair, Governor Tiff Macklem has recently played down risks to growth stemming from trade tensions, choosing instead to emphasize the upside that higher crude prices bring to the economy, while word of a near-finished trade agreement could further calm remaining worries. The economists anticipate traders will assign roughly a coin-flip chance to a second rate rise in December, noting that the institution has historically launched tightening cycles with back-to-back moves rather than isolated hikes.
Meanwhile, currency strategists at Scotiabank, Shaun Osborne and Eric Theoret, observed that the loonie is lagging behind other resource-linked currencies even as it strengthens against the euro, sterling and yen. They linked this improved tone to a narrowing of the two-year yield differential between the US and Canada, and pegged fair value for the dollar-loonie pair at roughly 1.4020. The pair’s trading pattern, they noted, looks range-bound, pointing to opposing doji formations forming near the 1.40 threshold alongside the 50-day moving average sitting around 1.4018.
Should the Bank of Canada rate decision result in a hike, it would represent the first policy shift in over two years and could lend support to the Canadian dollar if it strengthens expectations of additional tightening ahead. Movements in USD/CAD also remain closely tied to oil prices given Canada’s role as a major energy exporter, as well as to how the Fed’s own policy path unfolds.
Sources: Investing.com (forex); FXStreet; FXStreet