Loonie Faces Double-Header Test as Bank of Canada and Fed Release Key Signals

The Canadian dollar is set to face a crucial test on Wednesday as two key policy signals from major central banks are released within hours of each other. The Bank of Canada will publish its summary of deliberations for the September 2 meeting at 1:30 p.m. ET, while the Federal Reserve will announce its decision and new economic projections at 2 p.m. ET.

The Canadian dollar has been on the defensive, with a 0.32% decline in its daily average to C$1.3866 per U.S. dollar on Friday, its weakest level of the week. The Bank of Canada's official data shows that the broad Canadian effective exchange-rate index fell from 112.27 to 111.91 on Friday, indicating broad weakness in the Canadian dollar.

The main reasons behind this weakness are monetary policy and oil prices. The Bank of Canada has kept its overnight target at 2.25% since October 2025, while the Fed's target range is 3.50% to 3.75%. This gap rewards investors for holding short-term U.S. dollars over Canadian dollars.

The Fed's decision will have a more immediate impact on markets, with a quarter-point rate hike potentially widening the policy gap between the two countries. However, a shallow projected path could still disappoint dollar bulls and lead to further Canadian-dollar weakness.