The Canadian dollar dropped to its lowest level in 11 days against the U.S. dollar on Tuesday, as investors reduced their expectations of a rate hike by the Bank of Canada (BoC) next week.
The BoC is scheduled to announce its monetary policy decision on Oct. 25, and many analysts had predicted that it would raise its benchmark interest rate from 5% to 5.25%, following four consecutive hikes since July 2022.
However, the latest inflation data from Statistics Canada showed that the annual inflation rate slowed down to 3.8% in September, from 4% in August. This was below the market consensus of 4.1% and the BoC’s target range of 3% to 4%.
The lower inflation rate suggested that the BoC’s previous rate increases have been effective in curbing price pressures and bringing inflation closer to its long-term goal of 2%. It also indicated that the Canadian economy may be losing some momentum amid supply chain disruptions, labor shortages, and rising energy costs.
The Canadian dollar reacted negatively to the inflation report, as it implied that the BoC may pause its tightening cycle or adopt a more cautious stance in the near term. The loonie fell 0.3% to 1.3645 per U.S. dollar, or 73.29 U.S. cents, after touching an intraday low of 1.3702.
Meanwhile, the U.S. dollar gained strength after upbeat retail sales data boosted the outlook for the U.S. economy and increased the odds of a tapering announcement by the Federal Reserve in November.
The price of oil, one of Canada’s major exports, was little changed on Tuesday, as investors awaited the outcome of the diplomatic efforts to prevent a further escalation of the conflict between Israel and Iran.
The Canadian government bond yields were mixed across the curve, with the two-year yield steady at 4.899% and the 10-year yield up 7 basis points at 4.847%. The spread between the Canadian and U.S. 10-year yields widened to 31.9 basis points in favor of the U.S. bond, reflecting the diverging monetary policy outlooks between the two countries.
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