CAD Under Pressure Amid Widening Rate Differentials

The Canadian Dollar remains under pressure as the hawkish Federal Reserve contrasts with the steady Bank of Canada. The US dollar holds firm near the 1.4000 psychological mark, while the CAD struggles to gain traction.

According to analysts at Royal Bank of Canada, the widening gap between short-term US and Canadian yields is the main reason behind the CAD's recent underperformance. The currency has lost around 1% against the US dollar so far this month.

The Federal Reserve raised interest rates by 25 basis points (bps) to 3.75%-4.00% at its September monetary policy meeting, while the Bank of Canada kept its policy rate unchanged at 2.25% for a seventh consecutive meeting.

Chicago Fed President Austan Goolsbee expressed optimism that the Fed could get back on a path to 2% as long as there is no more evidence of demand overheating. He added that he would have no problem with interest rates moving lower if there is 'convincing evidence inflation is heading back to 2%.'

The Bank of Canada's focus has shifted to inflation pass-through, with Governor Tiff Macklem set to speak on economic developments in Halifax on Monday.