Canadian Dollar Falls as Higher US Yields Outweigh Oil Support

The Canadian Dollar fell to a two-month low as higher US yields outweighed support from oil prices. The USD/CAD exchange rate climbed to its highest level since mid-July, reaching around 1.4113 and up nearly 2% so far this month.

This rally is largely driven by the widening gap between short-term US and Canadian bond yields. The two-year US Treasury yield trades around 4.89%, while Canada's two-year government bond yield stands near 3.40%, leaving a gap of almost 150 basis points in favor of the US Dollar.

US Treasury yields are rising across the curve as traders see a growing chance that the Federal Reserve will raise interest rates again later this year. The central bank delivered a 25-basis-point increase last week, lifting the federal funds rate to 3.75%-4.00%.

New York Fed President John Williams said, 'We need to get inflation back to target in a timely manner,' adding that it is 'reasonable to see another rate hike by the end of the year.' The CME FedWatch Tool places the probability of an October rate increase at around 65%, up from 55% a week ago.