Canadian dollar nears four-week high as BoC hike bets climb

what happened

The Canadian dollar kept most of its Monday advance against the greenback, even as hawkish remarks from Bank of Canada Governor Tiff Macklem pulled attention away from domestic inflation figures. Reuters reports the loonie traded 0.3% stronger at 1.4095 per US dollar, or 70.95 US cents, after reaching 1.4071 intraday, its firmest level since September 23.

Macklem said on Saturday that the central bank expects to lift its quarterly inflation projection noticeably this month, citing persistently high crude and refined fuel prices linked to the Middle East conflict. Canada's annual inflation rate reached 3.1% in September, up from 3% in August and slightly below the 3.2% analysts had expected. A central bank survey also showed Canadians' five-year inflation expectations had risen. Swap pricing now implies roughly an 80% chance of a rate increase at the October 28 decision, compared with 30% on Friday. The benchmark rate has stayed at 2.25% since last October.

Adam Button, chief currency analyst at investingLive, said: "I think central bankers around the world are just seeing the demand from AI and no finish line in the Iran war and starting to think they have to do something." Investors were also watching a nonbinding referendum in Alberta on whether the province should secede, a vote where polls have consistently shown majority opposition.

why it matters

Higher oil prices feed into Canadian inflation and push expectations of tighter policy, which supports the loonie. Yields rose across the curve, with the 10-year up 11.1 basis points to 3.940%, while its gap with the US equivalent narrowed 6.3 basis points to about 121 basis points, still favoring the US note. WTI futures gained 1.7% to around $103.09 a barrel, underlining the energy link.

market impact

CAD, USD/CAD: expectations of a tighter Bank of Canada policy support the loonie and pressure the USD/CAD pair

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