After staging a brief recovery against the USD on Monday, the Canadian dollar is once again losing traction against the US dollar on Tuesday morning. Also of note, the Canadian government’s 10-year bond yields have declined by 3.6 basis points, settling at 3.997%. In line with U.S. government benchmark debt which dipped to 4.8498%.
This simultaneous declines in both the Canadian dollar and the 10-year government bond yields suggest that investors might be adopting a cautious stance on Canada’s economic future. This ‘risk off’ view could be driving the flight from Canadian dollars into for the safety of US dollar holdings.
The sentiment was probably amplified by recent remarks from the Bank of Canada Governor, Tiff Macklem. He hinted that interest rate cuts might start even before the inflation reaches the bank’s 2% target. However, he was quick to qualify his statement, emphasizing he doesn’t foresee such cuts in the foreseeable future.
In contrast, south of the border, expectations are that the FED will maintain the interest rates in the 5.25% to 5.5% bracket and prevailing investor sentiment is leaning heavily against any imminent rate hikes from the Fed. The perception is that the FED has much more of tightening bias as compared to the BoC. This is reflected in the interest-rate futures which suggest an almost negligible likelihood of a rate hike on Wednesday, there is still a 25% probability pinned on a modest quarter-point hike in December.
This tightening inclination with the FED combined by the ongoing Middle East conflict and unstable equity markets, will keep the US dollar elevated and the Canadian dollar depressed for the next few months.
The Canadian dollar is currently trading at 1.3876 CAD against the US Dollar.
