USD/CAD Surges to Mid-July High on Yield Spread and Diverging Central Bank Outlooks

The USD/CAD exchange rate surged to its strongest level since mid-July, reaching around 1.4113 and rising almost 2% on the month.

This move is largely driven by a widening two-year yield spread between the US and Canada, with the US Treasury yield hovering around 4.89%, while Canada's two-year yield remains near 3.40%, resulting in a gap of nearly 150 basis points.

The divergence in Fed and BoC outlooks also contributed to the rally, as markets price another Fed rate hike after last week's 25 bps increase took the federal funds rate to 3.75%-4.00%.