Canadian Dollar remains under pressure as hawkish Fed contrasts with steady BoC

• USD/CAD holds near 1.4000 as widening US-Canada rate differentials weigh on the Canadian Dollar.
• Falling Oil prices add pressure on the Loonie, while lower US Treasury yields cap the pair’s upside.
• BoC Governor Tiff Macklem’s speech takes centre stage for fresh clues about the policy outlook.

USD/CAD holds firm near the 1.4000 psychological mark on Monday as the Federal Reserve’s (Fed) hawkish outlook and widening US-Canada interest-rate differentials keep the Canadian Dollar (CAD) on the back foot. However, the pair lacks strong follow-through buying as a pullback in US Treasury yields leaves the US Dollar (USD) struggling to extend its recent gains.

US Treasury yields fall across the curve as Oil prices extend their decline. Energy prices are under pressure amid signs of diplomatic efforts surrounding the war in the Middle East and improving Saudi crude flows. US President Donald Trump said he would probably be open to meeting Iranian President Masoud Pezeshkian on the sidelines of the United Nations General Assembly this week, where he could also meet leaders from Persian Gulf countries.

The benchmark 10-year US Treasury yield trades around 4.95%, below the 5.04% level touched last week, its highest since 2007. The US Dollar Index, which tracks the Greenback's value against a basket of six major currencies, trades around 100.25, below Friday’s seven-week high of 100.56.

Falling Oil prices are another source of pressure on the commodity-linked Loonie, given Canada’s status as a major crude exporter. West Texas Intermediate (WTI) Oil trades around $93.50, falling for a fourth consecutive day and touching its lowest level in more than a week.

However, the widening gap between short-term US and Canadian yields remains the main reason behind the CAD’s recent underperformance. The currency has lost around 1% against the US Dollar so far this month.

At their respective September monetary policy meetings, the Fed raised interest rates by 25 basis points (bps) to 3.75%-4.00%, while the Bank of Canada (BoC) kept its policy rate unchanged at 2.25% for a seventh consecutive meeting. The updated dot plot showed that 16 of 18 policymakers expect at least one more rate increase this year, keeping the prospect of additional tightening firmly on the table.

Chicago Fed President Austan Goolsbee said on Monday that he is “optimistic that the Fed could get back on a path to 2% as long as there is no more evidence of demand overheating,” adding that he would have no problem with interest rates moving lower if there is “convincing evidence inflation is heading back to 2%.”

BoC focus shifts to inflation pass-through as Macklem speech looms

Analysts at Royal Bank of Canada note that BoC Governor Tiff Macklem is scheduled to speak on “economic developments” on Monday in Halifax, an event that “could provide some additional guidance ahead of its interest rate decision on Oct. 28.” They recall that at its last meeting, the BoC “flagged concerns about broader inflation implications from higher energy prices,” but emphasize that the meeting minutes “clarified that policymakers are more focused on pass-through to general inflation than on elevated oil prices themselves, which the central bank cannot influence.” Against this backdrop, RBC maintains its existing policy outlook but cautions that “risks to this forecast are tilting toward earlier hikes.”