Loonie at risk of bigger drop as focus shifts to Bank of Canada

Canada’s dollar is at risk of extending its decline if the nation’s central bank confirms that policy rates there have basically topped out even as persistent inflation concerns put upward pressure on short-end yields in the U.S.

With the U.S. currency resurgent in the past month, it could take a more-hawkish-than-expected message from Bank of Canada boss Tiff Macklem on Wednesday to really put a floor under the sliding loonie. That’s even more the case after U.S. central bank chief Jerome Powell used an appearance before Congress Tuesday to hammer home a hawkish message that bolstered the greenback. 

Swaps pricing for the Bank of Canada right now shows that one more hike at some point within the next few months is probable, but for the next couple of meetings at least they’re pointing to a pause. In contrast, markets linked to the Federal Reserve indicate another percentage-point of tightening from here.

The Canadian currency has fallen more than 3 per cent from its February peak and was trading around $1.375 per dollar on Tuesday. Nevertheless, its decline over the past month has been less dramatic than for commodity-related peers such as the Norwegian krone, the New Zealand dollar and the Australian dollar, which could provide scope for catchup. On the U.S. side of the equation, meanwhile, bets that the Federal Reserve will need to take its benchmark higher and stay there longer have solidified in recent weeks, widening the U.S.-Canadian differential.