Canadian Dollar Falls to Two-Month Low as Rising US Yields Outweigh Oil Support

The USD/CAD pair extended its strength on Thursday, touching its highest level since mid-July during the session. Over the past 12 trading days, the pair has recorded only one daily decline, reflecting accelerating market pricing of policy divergence between the Federal Reserve and the Bank of Canada. Despite crude oil prices holding at elevated levels, the continued climb in US Treasury yields has completely overshadowed oil's traditional support for the Canadian dollar.

**US Treasury Yield Rebound Takes Dominant Role**

The Federal Reserve raised its benchmark interest rate by 25 basis points to the 3.75%-4% range last week, marking its first rate hike since 2023, with the latest rate projections showing 16 of 18 officials expecting at least one more hike this year. This hawkish stance has pushed the benchmark 10-year US Treasury yield back to around 4.98%, approaching levels not seen since 2007, significantly enhancing the dollar's yield advantage. Against this backdrop, the US dollar index is trading above 100.50, near a seven-week high, exerting sustained pressure on the Canadian dollar.

**Bank of Canada's Policy Outlook Relatively Milder**

In stark contrast to the Fed's hawkish tone, market expectations for rate hikes by the Bank of Canada are notably more subdued. This divergence in monetary policy outlooks has become the core logic driving the sustained upward movement in USD/CAD. Even with international oil prices maintaining elevated levels, the Canadian dollar has failed to gain effective support from them, highlighting the dominance of yield differentials in the current market environment.

**Near-Term Direction Still Hinges on Yield Differential Dynamics**

According to the CME FedWatch Tool, investors currently see roughly a 55% probability of another 25-basis-point rate hike at the Fed's next meeting. If upcoming US economic data continues to support tightening expectations, US Treasury yields could move higher, potentially leaving further upside room for USD/CAD. However, an unexpected surge in oil prices could somewhat cushion the Canadian dollar's decline, though it would be difficult to fundamentally reverse the current yield-differential-driven trend.