The Canadian dollar CADUSD strengthened to a six-day high against its broadly weaker U.S. counterpart on Monday, as investors weighed the possibility that the Federal Reserve could leave interest rates on hold this week in the face of banking sector stress.
Traders have raised bets the U.S. central bank will hit the pause button to ensure financial stability when it releases its latest policy decision on Wednesday, a move that has been helping to narrow the gap between Canadian and U.S. bond yields.
The Bank of Canada has already moved to the sidelines.
“While U.S. yields retain a clear premium over Canadian bond yields still, a broader or more sustained pause in the global central bank tightening cycle, catching up with the BoC, could be more CAD-supportive if Canada remains aloof to global banking concerns,” Shaun Osborne, chief currency strategist at Scotiabank, said in a note.
Canada’s top six lenders have ample liquidity and manageable credit risks which will help them to emerge largely unscathed from the global banking turmoil, analysts said.
The Canadian dollar was trading 0.5% higher at 1.3660 to the greenback, or 73.21 U.S. cents, after touching its strongest since March 14 at 1.3653.
Canadian consumer price data, due on Tuesday, is expected to show inflation easing to 5.4% in February but remaining well above the BoC’s 2% target.
Before the banking turmoil began, investors were pricing in additional tightening by the BoC. They now see 60 basis points of easing by the end of 2023.
Canadian bond yields rose as U.S. Treasury yields clawed back some recent declines.
The 2-year was up 8.9 basis points at 3.642%, while it was trading 2.7 basis points further below its U.S. equivalent to a gap of 32 basis points. Still, the gap has narrowed from 76 basis points earlier this month.