Canadian Dollar Gains on BoC Hike Bets

The Canadian dollar strengthened to 1.385 per USD after the Bank of Canada stressed that there are significant upside risks to inflation. The Bank of Canada kept its key policy rate unchanged at 2.25% at its September meeting, as widely expected, but noted that inflation risks had increased, while new tariffs had made the growth outlook more uncertain. It left the future path for monetary policy open, saying it would adjust policy as needed. Oil prices, a major Canadian export, remained elevated amid supply disruptions stemming from the escalating Middle East conflict. Rising energy costs continue to fuel inflationary pressures and hawkish expectations for central banks. Canadian government bond yields moved higher across the curve.

The Canadian dollar weakened to 1.39 per USD from a three-month high of 1.376 reached on August 21st, as a more restrictive policy signal from Fed Chair Warsh supported the US dollar. Warsh said the Fed is tracking the PCE index as an inflation gauge, using firmer rhetoric than earlier suggestions that a newly created task force could shift the central bank’s preferred measure. Rate futures shifted toward pricing a potential Fed rate hike next month. Meanwhile, the BoC is widely expected to keep rates unchanged at its September 2nd meeting. A Fed hike alongside a BoC hold would widen the US-Canada rate differential, making US assets more attractive and putting further pressure on the Canadian dollar. Canada’s GDP expanded at its strongest pace in nearly two years, amid a rebound in auto production, providing a buffer against trade risks. However, President Trump’s threat to raise tariffs on Canadian cars, trucks and auto parts to 50% from January 1st, 2027, remained a headwind.

The Canadian dollar weakened to 1.38 per USD from the three-month high of 1.376 on August 21st as a greater deterioration to trade with the US hampered the outlook on growth. Canada imposed retaliatory tariffs of 15%-50% on a $20 billion of US annual import flows, including metals, agricultural goods, and motorcycles. This was Ottawa's response to the increase on US tariffs against Canada after trade talks between both economic partners collapsed. US President Donald Trump said that tariffs on all Canadian cars, trucks, automotive parts and steel would rise to 50% on January 1st, 2027, in addition to new tariffs on multiple other goods sectors. Risks to growth from higher tariffs drove markets to reduce expectations of a rate hike by the Bank of Canada this year, even though elevated energy prices threatened a pickup in inflationary risks.