Investing.com — The Canadian dollar rebounded from a nearly three-week low against its U.S. counterpart on Wednesday as investors ramped up bets that the Bank of Canada could raise interest rates in the coming months after the central bank warned that upside risks to inflation had increased.
The loonie was 0.4% higher at C$1.3840 per U.S. dollar, or 72.25 U.S. cents, after earlier touching C$1.3939, its weakest level since Aug. 13.
The Bank of Canada held its policy rate at 2.25%, as widely expected, but Governor Tiff Macklem said policymakers were prepared to raise borrowing costs multiple times if inflation remained too high. The shift in tone prompted investors to bring forward expectations for tighter monetary policy.
Markets were pricing a 44% probability of a 25-basis-point rate hike in October, up sharply from 24% before the decision, while a rate increase by year-end was fully priced in.
“Given the tone of the statement and press conference, the market is putting more weight on the inflation concerns than on the lack of confidence over growth prospects,” CIBC economists noted in a research note.
The Canadian dollar’s rebound came despite an earlier broad move into the U.S. dollar, with the loonie also finding support from higher oil prices. Crude is a key Canadian export and prices rose after renewed U.S.-Iran military strikes raised concerns about disruptions to global supply. U.S. crude futures settled 0.9% higher at $91.01 a barrel.
Investors will now turn to Canada’s economic data for further clues on whether the Bank of Canada will follow through with tighter policy. Trade data are due on Thursday, followed by employment figures on Friday, with both releases likely to influence expectations for the path of interest rates and the Canadian dollar.
The loonie’s move also underscores the changing balance of risks facing the Bank of Canada. Stronger energy prices could add to inflation through higher gasoline and other costs, while higher borrowing costs would weigh on domestic demand. Policymakers therefore face a more difficult trade-off between containing inflation and protecting economic growth.
Canada’s economy grew at an annualized 3.3% in the second quarter, beating the Bank of Canada’s forecast of 2.5%, helped by stronger exports, domestic demand, business investment and household spending. But much of that strength predates the latest escalation in U.S.-Canada trade tensions, including new U.S. tariffs on Canadian goods and Canada’s planned retaliatory measures.
