Canadian dollar recovers from nearly three-week low as Bank of Canada inflation concerns intensify

The Canadian dollar recovered from a nearly three-week low against its US counterpart on Wednesday after investors increased bets on a Bank of Canada interest rate hike this year, following the central bank’s warning that upside risks to inflation have increased.

The Canadian dollar strengthened 0.2% to C$1.3870 per US dollar, equivalent to 72.10 US cents, after touching its weakest level since August 13 at C$1.3939 earlier in the session.

The Bank of Canada left its key interest rate unchanged at 2.25%, as widely expected, but said the ongoing conflict in the Middle East had increased upside risks to the inflation outlook, while new US tariffs had made the growth outlook more uncertain.

“The market seems to be putting more weight on inflation concerns than on the lack of confidence in the growth outlook,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note.

Investors now see roughly a 75% probability that the Bank of Canada will raise interest rates this year, up from 64% before the monetary policy decision was announced.

Canadian trade and employment data are due on Thursday and Friday, respectively, and could provide further clues about the outlook for the domestic economy.

Oil supports Canadian dollar as bond yields rise

Oil prices, one of Canada’s major exports, held near one-month highs as traders assessed the risk of supply disruptions following overnight strikes by the United States and Iran.

US crude oil futures rose 0.3% to $90.46 a barrel.

Canadian government bond yields rose across the curve. The two-year yield climbed 3.9 basis points to 3.058%, approaching the upper end of its trading range since March.

The gap between Canadian and US two-year bond yields narrowed by 4.1 basis points to around 133 basis points in favor of US Treasuries, reversing part of the spread’s recent widening.