CAD Weakens as USD/CAD Rises Ahead of BoC Decision

Key Moments

CAD Slides as Risk-Off Mood Lifts the US Dollar

The Canadian Dollar (CAD) weakened against the US Dollar (USD) for a second straight session on Wednesday, as risk appetite deteriorated and global bond yields moved to multi-year highs. The USD/CAD pair pushed above 1.3920, reaching its highest level in two weeks, after starting Tuesday near 1.3845. The move came ahead of the Bank of Canada’s (BoC) interest rate announcement.

The US Dollar regained its appeal as a safe-haven currency this week. The upswing in global yields has increased pressure on central banks to maintain or adopt tighter policy stances, dampening demand for risk-sensitive assets. At the same time, a renewed escalation of tensions in the Middle East, following a period described as a month of tense calm, has reinforced the risk-off tone in markets.

BoC Expected to Hold Rates Steady

Later on Wednesday, the BoC is widely expected to keep its benchmark rate unchanged at 2.25%. Market participants also broadly anticipate that this level will be maintained through the remainder of the year. A tariff dispute with the United States and uncertainty related to the Middle East conflict are seen as weighing on Canada’s economic outlook, limiting the scope for more optimistic policy guidance.

Given this backdrop, the upcoming BoC decision is not expected to offer meaningful support to the Canadian Dollar, as investors focus instead on external risks and the relative policy stance of the Federal Reserve.

Fed Hike Bets Stay Firm Despite Softer Data

In the United States, data released on Tuesday showed that the ISM Manufacturing Purchasing Managers Index (PMI) slowed more than anticipated in August, while JOLTS Job Openings increased less than expected in July. These weaker readings did not derail the US Dollar’s advance, as markets continued to expect further policy tightening by the Federal Reserve at its September meeting.

Strategists at Brown Brothers Harriman highlighted that Fed funds futures now
“price in 67% odds of a 25bps hike on September 16 and imply 60bps of tightening over the next twelve months.”
They added that this
“pricing will remain elevated into the September meeting, with the August CPI on September 11 the decisive test.”

Attention on Wednesday is set to turn to the US ADP Employment report, which is projected to show a net gain of 47K private-sector jobs in August, following an increase of 44K in July.

Upcoming US Data in Focus

Investors will be monitoring the ADP figures for further insight into labor market conditions ahead of the Fed’s September decision. While recent manufacturing and job openings data have softened, they have not yet been sufficient to shift market conviction regarding additional tightening, as reflected in current pricing of Fed funds futures.

Central Bank Fundamentals

Central banks are tasked with maintaining price stability within their jurisdictions. They operate in environments where inflation and deflation pressures constantly interact, with rising prices for goods and services signaling inflation and falling prices indicating deflation. Major institutions such as the US Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) typically aim to keep inflation close to 2%.

When inflation deviates from that objective, central banks adjust their benchmark policy rates – commonly referred to as interest rates – at scheduled policy meetings. These decisions are communicated through official statements that explain whether rates are being held, raised, or lowered. Commercial banks then recalibrate savings and lending rates, influencing borrowing costs and returns on savings for households and businesses.

A substantial increase in policy rates is described as monetary tightening, while a significant reduction is known as monetary easing. These policy shifts are central to managing economic activity and guiding inflation back toward target levels.

How Monetary Policy Decisions Are Made

Monetary policy is usually set by a governing board or committee within a central bank, composed of members who are generally selected through a series of vetting procedures and hearings. Although the institution is often politically independent, members can have differing views on the appropriate stance for policy.

Officials who favor maintaining low interest rates and easier financial conditions, and who are comfortable with inflation running slightly above 2% to support stronger growth, are commonly described as “doves.” Those who prioritize higher rates to support savers and aim to keep inflation at or just below 2% are often labeled “hawks.”

Most central banks are led by a chairman or president who oversees policy meetings, works to forge consensus between hawkish and dovish members, and may cast a deciding vote if the committee is split. This leader also communicates the institution’s stance and outlook through public speeches, which are closely followed by markets.

To avoid triggering excessive volatility in interest rates, equity markets, or currencies, central banks attempt to guide expectations ahead of policy decisions. Members usually refrain from public comments in the days immediately preceding a policy meeting until after the outcome is released. This period is known as the blackout period.