Loonie Hits Four-Week High as Markets Price 80% Chance of Bank of Canada Rate Hike

The loonie woke up Monday with the wind at its back. The Canadian dollar held onto most of its gains against the greenback, trading 0.3% higher at 1.4095 — 70.95 U.S. cents — after touching its strongest intraday level since September 23.

The reason isn't just a good day for commodities. Governor Tiff Macklem spent the weekend sounding the hawkish alarm: the Bank of Canada expects to ‘sharply raise’ its quarterly inflation forecast this month, driven by persistently high crude oil and petroleum product prices. Swap-market pricing responded fast — investors now see roughly an 80% chance the Bank hikes rates at its October 28 decision, up from just 30% on Friday.

Why oil — and Iran — changed the math

U.S. crude futures were trading 1.7% higher at $103.09 a barrel Monday. Macklem, speaking to reporters on a conference call from Bangkok on Saturday, pointed at the Middle East conflict, curtailed shipments and damaged refinery capacity: ‘The risk that inflation broadens and becomes more persistent has gone up.’ His anchor, he said, is the 2% target: ‘We are prepared to adjust monetary policy as needed.’

September's inflation data complicated the picture. Headline CPI rose to 3.1% from 3% in August — below the 3.2% analysts forecast, but still at the top of the Bank's 1%-to-3% target band. The Bank's preferred core measures actually eased: CPI-median slowed to 1.9% and CPI-trim to 1.8%, their softest average since early 2021.

‘I think central bankers around the world are just seeing the demand from AI and no finish line in the Iran war and starting to think they have to do something,’ said Adam Button, chief currency analyst at investingLive. Scotiabank now expects a 25-basis-point hike next Wednesday, calling it insurance against upside inflation risks — including possible escalation after the U.S. midterms.

What it means for your money

The central bank has held its benchmark at 2.25% since last October. A hike on the 28th would be the first move in a year — and markets are already pricing roughly 100 basis points of tightening over the next year, according to Reuters.

For mortgage holders, the message is mixed. Fixed rates move with bond yields — the 10-year Government of Canada yield jumped 11.1 basis points to 3.940% Monday — so those are already costing more. Variable-rate borrowers only feel pain if the Bank actually moves. And the loonie? Currency desks say a hawkish hike could push USD/CAD toward 1.40; a soft hold could send it back above 1.42. Either way, Wednesday's decision is the week's main event.

The Alberta wildcard

There is one more variable the currency market is watching this week, and it has nothing to do with oil. Alberta voted Monday in a nonbinding referendum on separation — and polls have consistently shown a majority of Albertans oppose leaving Canada. ‘The currency market would love to see an emphatic rejection of separation by voters,’ Button told Reuters. A decisive no vote removes a tail risk hanging over the loonie; anything less clean keeps traders nervous.

Not everyone is convinced the hike happens. Royce Mendes of Desjardins has argued the Bank could still hold, saying that ‘given the recent slowdown in the economy, the Bank of Canada may still be able to argue that inflation will return to target without raising rates this month.’ The Bank’s own Business Outlook Survey — due Monday — could yet move expectations before the decision. Either way, the days of quiet rate decisions in Ottawa are over.

Editor's note: we could not find a current video from a mainstream news outlet on this specific market development — full written reporting is linked below.

Sources

• Reuters — Canadian dollar notches nearly four-week high on BoC rate-hike bets
• investingLive — Scotiabank expects a 25 bp hike next week
• Convera — Softer core inflation halts loonie's recovery

Photo: Bank of Canada Governor Tiff Macklem — Bank of Canada – Banque du Canada / Wikimedia Commons (CC BY 2.0).