Canadian Dollar Hits 12-Day Low as Fed Hike Bets Overshadow Oil Surge

The Canadian dollar fell to a near 12-day low against the U.S. dollar on Monday, as the greenback's strength on rising rate-hike expectations overshadowed support from a significant rally in crude oil prices. Steady domestic inflation data provided little impetus for the loonie, leaving it vulnerable to U.S. monetary policy sentiment.

Market Action

The USD/CAD pair traded around C$1.392, leaving the Canadian dollar approximately 0.3% weaker on the day. The currency touched its weakest point since September 2, hitting a session low of C$1.3929.

The move was primarily driven by a robust U.S. dollar, with the U.S. Dollar Index (DXY) climbing nearly 0.4% as investors positioned for a more hawkish Federal Reserve. Markets are now pricing in a roughly 90% probability of a Fed rate increase this week, according to Investing.com.

Conflicting Economic Signals

Surging oil prices, typically a major support for the currency of the major crude exporter, failed to lift the loonie. Brent crude futures jumped above $108 a barrel amid supply concerns in the Middle East. However, this rally is also fueling global inflation fears, which in turn reinforces the case for tighter U.S. monetary policy and a stronger dollar.

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Meanwhile, domestic economic data offered little reason for the Bank of Canada to alter its course. Canada’s Consumer Price Index (CPI) for August met expectations, showing:

• Annual inflation held steady at 3.0%, unchanged from July.
• Prices fell 0.1% on a monthly basis.
• The Bank of Canada's core measures remained contained, with the median at 2.0% and the trimmed-mean at 1.9%.

Context and Outlook

The inflation figures, while still above the central bank's 2% target, did not show the broad acceleration that might prompt a more aggressive policy response from the Bank of Canada. This leaves the Canadian dollar's trajectory largely dependent on external factors, particularly the Federal Reserve's upcoming interest rate decision and forward guidance.