The Canadian dollar strengthened to trade just below 1.41 against the US dollar, driven by increasing anticipation of more relaxed monetary policy in the US. Recent softer US macroeconomic data has led market participants, monitored by the CME FedWatch tool, to estimate an 80% chance of a 25 basis point interest rate cut by the Federal Reserve in December. This anticipation has consequently weakened the US dollar, removing a significant obstacle for the Canadian dollar, or loonie.
Meanwhile, the Bank of Canada has paused its overnight rate at 2.25%, and market speculation suggests that the BoC will remain cautious through December. This stance provides an interest rate differential that attracts carry trade inflows into the Canadian dollar. Although oil prices have declined to the low $60s per barrel, partly due to diplomatic efforts surrounding Ukraine that might result in increased Russian oil exports, the impact on the loonie has been limited so far.
Market participants are closely watching for the release of third-quarter GDP figures and current account data, as these will offer more insights into the possible future direction of the Bank of Canada's policy.
