Canadian Dollar dips to fresh two-month lows amid higher US yields, Fed hiking bets

The Canadian Dollar (CAD) extends losses for the fourth consecutive day against the US Dollar (USD) on Thursday, as surging US Treasury yields and rising bets of Federal Reserve (Fed) rate hikes are propelling the Greenback across the board. The USD/CAD pair has reached levels above 1.4100 for the first time in two months and is nearing the late July highs, in the 1.4130 area.

Moderate risk aversion is driving markets on Thursday as US Treasury yields surge to their highest levels in more than 20 years, threatening to push borrowing costs for mortgages, credit cards and corporate loans, ultimately adding strain on economic growth.

These fears are offsetting the positive impact on the CAD of the rebound in Oil prices, Canada’s main import. Crude Oil shows a significant recovery from Wednesday’s lows, with the barrel of Brent Oil returning to the key $100 level, as US and Iran representatives failed to reach any relevant agreement at the United Nations (UN) General Assembly held in New York this week, which has curbed hopes of any imminent reopening of the critical Strait of Hormuz.

US yields extend gains as PMI shock fuels questions over Fed positioning

Strategists at Societe Generale note that the “10y UST has crossed its 2023 peak (5.02%), resulting in an extension of the uptrend.” They acknowledge that “the move appears somewhat stretched,” but stress that “signals of a meaningful pullback are not yet visible.”

The bank adds that the latest “PMI was an accelerator for the leap in 2s to 4.94% (Fed behind the curve?) and 10s to 5.09%,” with the data “most likely” coinciding with or triggering “a sell/ stop loss order,” a move that was “exacerbated potentially by concession before the 5y UST auction.”

US data released on Wednesday revealed that business activity grew at its strongest pace in more than five years, with jobs and wages rising fast and input prices surging amid higher energy costs. This has heightened concerns that the US economy might be overheating, which strengthens the case for further Fed tightening over the coming months.

Later on Thursday, the focus will shift to Canada's Retail Sales data for July, which is expected to show a 0.8% decline, largely reversing the 0.6% growth seen in June. In the US, investors will pay attention to the weekly Initial Jobless Claims figures to confirm signals of a tighter labour market shown by Wednesday's PMI report. Later on, Philadelphia Fed President Anna Paulson and Cleveland Fed President Beth Hammack are likely to provide further insight into the banks' immediate policy plans.