Canadian Dollar Strengthens as Oil Spike Fuels Bank of Canada Rate Hike Speculation

The Canadian dollar strengthened against its U.S. counterpart on Wednesday, supported by a sharp rally in crude oil prices amid rising geopolitical tensions and increased bets on a Bank of Canada interest rate hike.

The currency, known as the loonie, traded 0.2% higher at 1.4170 per U.S. dollar, or 70.57 U.S. cents, after moving within a daily range of 1.4156 to 1.4210, according to Investing.com data.

Geopolitical Tensions Drive Crude Rally

The primary driver for the Canadian dollar's advance was a significant jump in the price of oil, a key Canadian export. Crude oil prices climbed 5.2% to $74.10 a barrel after U.S. President Donald Trump stated that an interim agreement with Iran was "over," signaling the potential for new military strikes.

The surge in energy prices provided a direct tailwind for the commodity-linked currency. However, it also weighed on broader market sentiment, with global stock markets declining on concerns that higher energy costs could fuel inflation and lead to tighter monetary policy globally.

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Market Reprices BoC Expectations

Investors significantly adjusted their expectations for the Bank of Canada's policy path in response to the inflation fears. Key takeaways include:

• Data from the swap market now indicates a 60% probability of a BoC interest rate hike this year.
• This represents a substantial increase from the 40% chance priced in by the market on Tuesday.

In a research note, Scotiabank strategists Shaun Osborne and Eric Theoret commented on the currency's resilience, stating, "The CAD has performed relatively well through the overnight volatility." They added that "Negative CAD sentiment is moderating but spot remains quite elevated."