Treasury yields rise ahead of closely-watched 10-year auction and FOMC minutes

The Canadian Dollar experienced a decline as the market anticipated potential interest rate hikes from the Federal Reserve (Fed). The USD/CAD pair climbed to approximately 1.4220 early Wednesday, prompting traders to revise their expectations of a rate increase at the October FOMC meeting following weak US job data. However, analysts anticipate further hikes later in the year and next year.

September's Nonfarm Payrolls rose by 29K, lower than the prior 133K and below the market's consensus of 90K, according to the US Bureau of Labor Statistics (BLS). The Unemployment Rate increased to 4.2% in September from 4.1% in August. Kansas City Fed President Jeff Schmid stated that the central bank should continue raising its policy rate to curb inflation, even if higher long-term yields impact some US sectors.

The odds of a 25 basis point (bps) increase in October dropped to 21.6% from around 51% a week ago, while the probability of a rate hike at the December meeting rose to 86.2%. Commonwealth Bank of Australia currency strategist Samara Hammoud noted that markets reacted sharply to each US data release and policymaker speech, with Fed Chair Kevin Warsh's lack of forward guidance exacerbating the volatility.

Analysts at Rabobank highlighted Canada's rising political fragmentation, with the separatist Parti Québécois winning 30% of the vote in a provincial election and Alberta voting on independence on October 19, indicating a growing sense of domestic uncertainty. Fed's Schmid delivered a slightly more hawkish tone compared to historical averages, with an 8/10 FXS Speechtracker score against a 7.5/10 baseline.

The sentiment index rose to 137.91, indicating a further hawkish stance from the Fed. The technical analysis suggests a bullish near-term bias for USD/CAD, with the pair trading above its 100-day simple moving average and Bollinger Band's middle band, nearing the upper Bollinger band and flirting with overbought territory. The main factors driving the CAD include interest rates, oil prices, economic health, inflation, and trade balance, while market sentiment and the US economy also influence the currency.