The Canadian dollar CADUSD strengthened against its U.S. counterpart on Monday as Wall Street rallied and a survey showed that domestic expectations for inflation remain elevated, supporting bets for further interest rate hikes by the Bank of Canada.
The loonie was trading 1.2% higher at 1.3720 to the greenback, or 72.89 U.S. cents. It has regained some ground after hitting last Thursday its weakest intraday level in more than two years at 1.3977.
Business sentiment has softened in Canada and most firms now think a recession is likely, a Bank of Canada survey showed, but inflation expectations remain high, leaving the central bank little choice but to continue raising rates.
“With firms’ wage expectations still elevated and consumers’ short-term inflation expectations heading higher, the Bank will remain in a hawkish mood at its meeting this month,” Stephen Brown, a senior Canada economist at Capital Economics, said in a note.
Money markets expect the BoC to raise interest rates by at least 50 basis points at the Oct. 26 policy decision, after having tightened by three percentage points since March to a 14-year high of 3.25%.
BoC Senior Deputy Governor Carolyn Rogers is due to participate in a panel discussion at 4 p.m. ET (2000 GMT), which might offer further clues on the policy outlook.
U.S. stocks surged as strong earnings and a policy reversal from Britain’s new finance minister stoked investor risk appetite.
The price of oil, one of Canada’s major exports, settled 0.2% lower at $85.46 a barrel amid fears that high inflation and energy costs could drag the global economy into recession.
Canadian government bond yields were lower across the curve. The 10-year eased 7.7 basis points to 3.413%, dropping 7.5 basis points further below its U.S. equivalent to a gap of roughly 59 basis points.