Canadian Dollar holds steady as US Dollar rebound caps gains

Three-week lows give way to a US Dollar recovery, helping USD/CAD recoup some losses.
Middle East supply concerns lift Oil prices, lending support to the Canadian Dollar.
Next week's Fed and BoC rate decisions are in focus for traders.

USD/CAD is trading near 1.4032 at the time of writing. The pair has recovered some ground on Thursday after touching an intraday low of 1.4013, its weakest level in a month. The US Dollar (USD) is attempting to recover from a fresh three-week low reached earlier in Asian trading. Gains remain constrained, however, as higher Oil prices linked to Middle East tensions help the Canadian Dollar (CAD) outperform most major currencies.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Demand for government bonds is increasing as global equities sell off over growing concerns about AI-related investments. With sentiment still fragile, the shift into bonds is driving yields lower across major economies.

At around 5.03%, the benchmark 10-year US Treasury yield is down 1.50% on the day, having touched 5.36% earlier this month. The retreat in Treasury yields has been accompanied by US Dollar weakness, following the US Dollar Index's (DXY) approach towards 103.00 last week.

Fresh demand for the US Dollar nevertheless indicates that some traders are seeking safety in the currency. Expectations of higher US interest rates also continue to offer underlying support. After an intraday low of 101.45, the DXY is trading near 101.78. The index measures the Greenback against a basket of six major currencies.

Central banks are maintaining a hawkish stance as energy-related risks from the Middle East war continue to fuel global inflation. Reports that the US and Israel are considering fresh strikes against Iran after the US midterm elections have pushed Oil prices to five-week highs. Continued Houthi attacks in Saudi Arabia are also increasing supply risks throughout the Gulf region.

With the continuing energy shock threatening to prolong elevated inflation, expectations are strengthening that central banks will have to retain restrictive monetary policies. Attention now turns to next week's Federal Reserve (Fed) monetary policy meeting. Following a 25 basis points (bps) increase in September, the US central bank is widely expected to hold interest rates steady.

Around 89% is the probability of a December rate rise, according to the CME FedWatch Tool. With another increase priced in for that month, traders will scrutinise the Fed's signals on its next policy step.

For the Bank of Canada (BoC), expectations of its first rate increase of the year at the 28 October meeting are gaining ground. Monday's data showed annual Canadian inflation reaching 3.1% in September, a four-month high, as gasoline prices rose.

The Loonie's gains should nonetheless be constrained by the substantial US-Canada gap in yields and interest rates. The benchmark Canadian 10-year government bond yield is around 3.81%.

Canadian Dollar: Today's Currency Performance

The Canadian Dollar (CAD) recorded its largest gain against the New Zealand Dollar today. The table below sets out its percentage moves against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.25%	0.14%	-0.57%	-0.10%	0.21%	0.42%	-0.07%
EUR	-0.25%		-0.13%	-0.86%	-0.39%	-0.04%	0.20%	-0.35%
GBP	-0.14%	0.13%		-0.72%	-0.27%	0.08%	0.31%	-0.21%
JPY	0.57%	0.86%	0.72%		0.46%	0.78%	0.97%	0.50%
CAD	0.10%	0.39%	0.27%	-0.46%		0.33%	0.55%	0.04%
AUD	-0.21%	0.04%	-0.08%	-0.78%	-0.33%		0.19%	-0.28%
NZD	-0.42%	-0.20%	-0.31%	-0.97%	-0.55%	-0.19%		-0.45%
CHF	0.07%	0.35%	0.21%	-0.50%	-0.04%	0.28%	0.45%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. To read CAD (base)/USD (quote), for example, locate the Canadian Dollar on the left and follow that row across to the US Dollar column. The intersecting cell shows the pair's percentage change.