Canadian Dollar Set for Second Straight Weekly Decline Amid Interest Rate Differential

The Canadian Dollar is set to decline for a second consecutive week despite a slight pullback in the US Dollar. The USD/CAD pair has remained elevated near mid-July levels, with the Loonie under pressure due to its higher interest rate differential and stronger economic growth prospects. The Federal Reserve's decision to raise interest rates by 25 basis points last week and signal additional hikes this year have widened the front-end yield gap in favor of the US Dollar.

The two-year US Treasury yield is trading around 4.87%, slightly below Wednesday's peak of 4.94%, its highest level since 2004, while Canada's two-year government bond yield stands near 3.35%. The interest rate differential has left a yield gap of almost 150 basis points in favor of the US Dollar.

Traders are focusing on upcoming economic data releases, including the US Personal Consumption Expenditures (PCE) inflation report and Nonfarm Payrolls (NFP) report next week. Canada's July Gross Domestic Product (GDP) data will also be closely watched, with Bank of Canada Governor Tiff Macklem warning that new US tariffs could push Canadian fourth-quarter growth below 1%.