Canadian Dollar extends winning streak as Fed-BoC policy divergence comes into focus

USD/CAD slips below 1.4000 to its lowest level in a month on Friday, extending its losing streak to seven consecutive days as traders expect the Federal Reserve (Fed) and the Bank of Canada (BoC) to take different paths at next week’s meetings. This supports the Canadian Dollar (CAD), while higher Oil prices linked to Middle East tensions provide an additional tailwind. At the time of writing, the pair trades around 1.3975, on track for a second consecutive weekly decline.

USD/CAD has unwound roughly half of its September rally as expectations grow that the BoC could deliver its first rate hike of the year at its October 28 meeting amid heightened energy-driven inflation risks. Canada’s annual inflation rate rose to 3.1% in September, its highest level in four months.

Data released on Friday showed Canadian Retail Sales rose 1.2% in August after falling 0.8% in July. The increase was slightly below the 1.3% forecast. Excluding autos, sales grew 1.2%, beating expectations of 1.0% after a 0.8% decline.

According to TD Securities, an October move from the BoC would be “reckless. Not necessarily wrong. But a needless risk.” Their rates strategists therefore “look for the Bank of Canada to hold at 2.25% in October, before hiking 25bps in December,” followed by “an additional 25bp hike in January, bringing the overnight rate to the mid-point of the Bank's range of neutral rate estimates.”

Given what they describe as a “close call,” TD Securities cautions that they “would avoid any outright positions heading into the meeting.” They note that “recent Fedspeak has been emphasizing a more gradual path to hiking rates and lower urgency, while Macklem has surprised markets with the seemingly aggressive stance he has taken in recent communications.” In their view, “heading into the meeting, there is a more widely accepted expectation that the Fed holds, setting up for an asymmetry that favours CAD outperformance.”

Across the border, the US Dollar holds its ground after recent weakness driven by falling Treasury yields, as concerns over the sustainability of AI-related investments weighed on equities and pushed investors toward government bonds. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.70 after touching a three-week low of 101.45 on Thursday.

The Fed is widely expected to leave interest rates unchanged next week after raising them by 25 basis points in September. Traders will watch how policymakers balance energy-driven inflation pressures against concerns that a slowdown in AI-related investment could weigh on economic growth. Markets still price in 80% chance of a December hike, but a more cautious message from the Fed could put renewed pressure on the US Dollar.