Canadian Dollar climbs to two-week high despite hawkish Fed expectations

On Friday, the Canadian Dollar (CAD) surged to its highest level in over two weeks, climbing to 1.4138 against the US Dollar (USD), after reaching a peak of 1.4299 the previous day. The strength of the Canadian Dollar is attributed to the weakening of the US Dollar, which has lifted the CAD to its best level since April 2025. The decline in the USD is due to concerns over AI-related investments impacting equities and encouraging investors to shift towards government bonds, driving US Treasury yields lower and diminishing the allure of dollar-denominated assets.

The benchmark 10-year US Treasury yield currently sits near 5.08%, close to three-week lows. The US Dollar Index (DXY), which gauges the Greenback against a basket of six major currencies, is at 101.65 after surging to an 18-month high of 102.94 earlier in the week. The risk-averse sentiment prevails despite a hawkish Federal Reserve (Fed) outlook following stronger-than-expected US inflation reports.

In September, the Consumer Price Index (CPI) rose 0.6% month-on-month, the largest monthly increase since April, while the Producer Price Index (PPI) increased 1.3%. Rising oil prices, stemming from the Middle East conflict and escalating tensions between Saudi Arabia and Houthi rebels, continue to fuel inflation pressure. Fed Chair Kevin Warsh, in a recent interview in Bangkok, declined to commit to a policy decision, stating, "I don't prejudge meetings."

According to the CME FedWatch Tool, there is a 15% chance of a rate hike at the October 27-28 meeting, with a 90% probability of an increase in December. However, traders anticipate a rate hike in December for the Canadian Dollar, with the Bank of Canada (BoC) expected to maintain unchanged rates in October. Economists at the Royal Bank of Canada (RBC) believe upcoming Canadian inflation figures and the BoC's Q3 Business Outlook Survey will be crucial for the BoC's next interest rate decision on October 28, as policymakers are cautious about high oil prices potentially affecting non-energy components and consumer inflation expectations.