Canadian Dollar loses ground ahead of Fed Minutes

USD/CAD rebounds sharply on Wednesday, rising nearly 0.45% as the US Dollar (USD) remains firmly bid across the board, supported by surging US Treasury yields. Attention now turns to the minutes of the Federal Reserve’s (Fed) September monetary policy meeting, due at 18:00 GMT. At the time of writing, the pair trades around 1.4257, hovering near an 18-month high.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 102.36, holding near levels last seen in April 2025. Meanwhile, the benchmark 10-year US Treasury yield rises to around 5.330%, approaching Monday’s peak of 5.349%, its highest level since 2002.

Against this backdrop, the Canadian Dollar (CAD) remains under selling pressure, with the widening yield differential between US and Canadian government bonds emerging as a key driver of the decline. Canada’s 10-year bond yield stands near 3.979%, leaving a gap of roughly 135 basis points with its US counterpart.

The wider differential increases the relative appeal of US Dollar-denominated assets, offsetting support for the commodity-linked Loonie from rising Oil prices. Elevated energy prices also keep inflation risks high on both sides of the border, reinforcing expectations that monetary policy may need to remain tight.

Traders will closely examine the Federal Open Market Committee (FOMC) meeting minutes for fresh guidance on the likelihood of additional tightening after the US central bank delivered a 25-basis-point rate hike in September. However, softer-than-expected US employment and Personal Consumption Expenditures (PCE) inflation data have reduced expectations of another increase at the October 27-28 meeting.

Strategists at OCBC Bank note that recent Fed communication has signalled "a more patient and data-dependent approach to further tightening, even as policymakers remain focused on inflation." They point out that "markets are still pricing slightly more than three Fed rate hikes over the next 12 months," a path they argue "appears aggressive given the emerging signs of labour market moderation."

OCBC adds that "higher long-term Treasury yields have already tightened financial conditions significantly, reducing the need for the Fed to do all the heavy lifting through policy rates." With "financial conditions doing more of the tightening work," the bank believes "the hurdle for further significant Fed hikes remains high," suggesting scope for markets to reassess the current degree of Fed tightening priced into the Dollar.

On the Canadian side, the Bank of Canada (BoC) kept its policy rate unchanged at 2.25% in September. Markets still expect at least one hike by year-end, although uncertainty surrounding economic growth and US trade policy could keep the central bank cautious.