Canadian dollar rises on Bank of Canada interest rate hike expectations

The Canadian dollar has recorded its longest daily winning streak since March 2022, rising for seven consecutive trading sessions before stabilizing against the US dollar. The currency recently traded at approximately 1.4010 against the USD, or 71.38 US cents.

Market analysts attribute this strength to shifting expectations regarding monetary policy from both the Bank of Canada (BoC) and the US Federal Reserve. Investors are currently pricing in an 80% probability that the BoC will implement a 25-basis-point interest rate hike this Wednesday, bringing the policy rate to 2.50%. This potential move would mark the first rate increase since July 2023, aimed at preventing energy-driven inflation from spreading throughout the economy.

Meanwhile, expectations for the Federal Reserve suggest policymakers may signal that they will not increase short-term borrowing costs further this week. However, Sarah Ying, Head of FX Strategy at CIBC Capital Markets, noted that a hawkish stance from the Fed regarding potential tightening in December could provide a floor for the USD/CAD parity.