BoC Hike Timing Crucial for Canadian Dollar

The Canadian dollar's relief from interest rate hikes comes after the US Federal Reserve stopped increasing rates. In September, USD/CAD rose to the top of its range since 2025 as traders raised their expectations for a Fed hike in 2027 by nearly nine-tenths of a percentage point, while expecting the Bank of Canada to increase its rate by less than half a point. This widened the gap between the two expected rates, moving in favor of the US dollar.

Since August, traders have priced both central banks to continue raising interest rates, with the gap remaining wide until the Fed stopped hiking. The BoC has held at 2.25% for seven consecutive meetings, leaving US rates 1.625 percentage points above Canada's. The gap matters because it represents the extra interest earned from holding US dollars instead of Canadian dollars.

The pair's movement is due to changes in the expected gap between the two central banks' rates for September 2027. A BoC that starts raising interest rates after the Fed has stopped will benefit the Canadian dollar, while a BoC hold or stop would push USD/CAD higher.