Canadian Dollar languishes near 0.8200 as Fed tightening bets buoy US Dollar

The Canadian Dollar (CAD) hovers near monthly lows against the US Dollar (USD) on Tuesday, as rising expectations that the Federal Reserve (Fed) will tighten its monetary policy on Wednesday underpin speculative demand for the Greenback. The USD/CAD consolidates gains at the 1.3900 area, after having rallied continuously during the last four days.

Markets are focusing on the two-day Federal Open Market Committee (FOMC) meeting, starting on Tuesday and expected to deliver the first interest rate hike in the last three years.

Futures markets are pricing a 92% chance of a 25 basis point hike on Wednesday, according to data from the CME’s Fed Watch Tool. A strong employment report in August and the hot inflation figures released on Tuesday have boosted expectations of some Fed tightening on Wednesday and another one before the year-end, probably in December.

High Crude prices support the Canadian Dollar

The Canadian Dollar, on the other hand, is drawing some support from the elevated Oil prices. Brent Oil trades at $104.35 at the time of writing, highlighting a 22% appreciation from late-August lows, while the US Benchmark WTI trades a few cents below $100. Oil is Canada's main export, and higher prices tend to have a positive impact on the Loonie.

The Oil rally has offset soft Canadian macroeconomic data seen on Monday. August Consumer Price Index (CPI) contracted by 0.1%, below the 0% market consensus, following a 0.5% rise in July. Yearly inflation, however, kept growing at a steady 3% pace, in line with market expectations. Beyond that, Manufacturing Sales contracted by 0.4%, beyond the expected 0.2% decline, adding negative pressure on the CAD.

These figures provide some leeway for the Bank of Canada (BoC) to keep interest rates on hold in the coming months, aiming to support economic growth in an uncertain context amid the trade war with its southern neighbour. This is leading to a monetary policy divergence that is undermining speculative support for the Canadian Dollar.