The Canadian dollar surged to its highest level in four weeks on Tuesday, benefiting from a shrinking interest rate gap between Canada and the U.S. and a decisive vote in Alberta to stay in Canada. The loonie climbed 0.5% to 1.4045 per U.S. dollar, or 71.20 U.S. cents, reaching an intraday peak of 1.4033, its strongest since September 22. Among Group of 10 currencies, only the British pound saw a larger gain.
Marc Chandler, chief market strategist at Bannockburn Capital Markets, attributed the loonie’s rise to a narrowing discount against the U.S. dollar. The gap between Canada’s 2-year yield and its U.S. counterpart shrank to 146 basis points from around 160 earlier this month, as investors increased bets on a Bank of Canada rate hike next week. Swap market data now suggests an 80% chance the BoC will raise its benchmark rate by 25 basis points to 2.50% on October 28, following hawkish remarks from Governor Tiff Macklem and signs of rising long-term inflation expectations.
The Alberta referendum, which saw 76% of voters choose to remain in Canada, provided additional market confidence. Chandler noted that the outcome was the least disruptive option, preserving the status quo. Prime Minister Mark Carney welcomed the result as a step toward national unity amid ongoing trade tensions with the U.S.
Meanwhile, oil prices retreated from recent highs, with U.S. crude futures down 0.9% to $102.75 a barrel, as traders weighed Houthi attacks on Saudi infrastructure and vessel incidents in the Gulf. Canadian government bond yields fell across the curve, with the 10-year yield dropping 6.8 basis points to 3.894%.