Canadian Dollar Reaches Three-Month High Supported by Stable Bank of Canada Policy

Ottawa | EcoPulse24

The Canadian dollar has seen a notable rise, surpassing the level of 1.38 against the US dollar, reaching its highest point in nearly three months amid divergent monetary policy paths between Canada and the US and stable domestic inflation expectations.

This performance is supported by data showing the annual headline inflation rate holding steady at 2.2%, along with a trimmed mean measure of inflation dropping to 2.8%, the lowest level in ten months. These indicators reinforce market confidence that price pressures in Canada continue to gradually decline towards the Bank of Canada's 2% target without the need for a sharp change in monetary policy.

In this context, the Bank of Canada decided to keep the interest rate at 2.25%, considering the current monetary policy to be 'close to the appropriate level,' which has eased market expectations regarding a rapid or significant rate cut in the near term. This stance has helped stabilize yield spreads between Canada and the US, supporting demand for the Canadian dollar.

Conversely, a more dovish tone from the US Federal Reserve has weakened the US dollar. Although the Fed's official projections indicate only one rate cut next year, Chairman Jerome Powell's remarks about the possibility of 'pausing or cutting slightly or more than slightly' have been interpreted by investors as opening the door for further monetary easing.

As a result, markets have raised the likelihood of two or more US rate cuts in 2026 to over 50%, narrowing the yield gap between the US and Canada in favor of the Canadian currency and enhancing its gains during today's trading.