Canadian Dollar Hits 12-Day Low as Fed Rate Hike Bets Eclipse Oil Price Surge

The Canadian dollar fell against a broadly stronger U.S. dollar on Monday, touching a near two-week low as the tailwind from surging crude oil prices failed to offset expectations of tighter U.S. monetary policy. The USD/CAD pair traded around C$1.392, with the loonie weakening by about 0.3% on the day after hitting its lowest point in 12 days at C$1.3929.

Dollar Strength Dominates Markets

The primary driver for the loonie's weakness was the strength of the U.S. dollar, which gained on safe-haven demand amid geopolitical tensions and a selloff in global technology stocks. The U.S. Dollar Index, which measures the greenback against a basket of major currencies, was up nearly 0.4% on Monday.

This move was amplified by growing investor conviction that the U.S. Federal Reserve will raise interest rates this week to combat inflation. According to the source material, markets are pricing in approximately a 90% probability of a Fed rate hike, a development that typically boosts the appeal of the U.S. dollar.

Oil Surge Provides Limited Support

Normally, a sharp rise in oil prices provides significant support for the currency of Canada, a major crude exporter. Brent crude, the global benchmark, jumped above $108 a barrel on Monday amid concerns over supply disruptions in the Middle East.

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However, the positive impact on the loonie was muted. The same inflation concerns driving oil prices higher are also strengthening the case for a more aggressive, or hawkish, stance from the U.S. Federal Reserve, pulling investor capital toward the U.S. dollar.

Domestic Inflation Data Neutral

Canadian economic data released Monday offered little fresh impetus for the currency. Canada’s consumer price index (CPI) rose 3.0% year-over-year in August, a figure that was unchanged from July and met market expectations. On a monthly basis, prices fell 0.1%.

Crucially for monetary policy, the Bank of Canada’s preferred core inflation measures remained contained, with the median and trimmed-mean gauges at 2.0% and 1.9%, respectively. With underlying price pressures not showing broad acceleration, the data gives the central bank little reason to pursue a more aggressive policy path, leaving the loonie to be driven by external factors.