Canadian Dollar Reaches Six-Week Peak as Yield Gap Narrows

Market Move

The Canadian dollar rose to a six-week high against the US dollar on Thursday following a narrowing of the bond yield gap between the two countries. The loonie traded 0.1% higher at 1.3982 per US dollar, which equals 71.52 US cents. Earlier in the session, the currency hit 1.3966, marking its strongest intraday level since September 16.

Interest Rates

The currency shift follows the Bank of Canada raising its key interest rate by 25 basis points to 2.50% on Wednesday. The central bank noted that more rate hikes might be needed to stop rising energy costs from fueling broader inflation. Meanwhile, the Federal Reserve kept its policy rate steady.

Bond Yields and Oil

The gap between Canada and US two-year bond yields shrank by 4.7 basis points down to about 128 basis points, favoring the US note. This spread had reached 160 basis points earlier in the month, which was the widest gap since February 2025. Klarity FX director Amo Sahota in San Francisco stated that the yield spread movement gave traders confidence to chase further gains for the loonie. Sahota also pointed out that elevated oil prices continue to support the currency. US crude oil futures dropped 0.8% due to hopes for peace talks between the US and Iran, but oil stayed high at $102 a barrel. Oil remains one of Canada's major exports.

Global Currency Factors

The US dollar dropped against a basket of major currencies because US Treasury yields eased. This came after the release of US inflation data that mostly matched market expectations. Meanwhile, the Canadian 10-year yield edged down half a basis point to 3.853%.

Provincial Budget

Ontario released a fiscal update showing the province expects a wider budget deficit than previously planned along with a delayed return to a balanced budget. The province plans to provide tax relief for businesses and support for sectors hit hard by tariffs.

Context

Central bank interest rate decisions directly influence bond yields and currency values by changing how much return investors can earn on government debt. When a central bank raises rates faster than its peers, the local currency often strengthens as investors seek higher returns. Canada's heavy reliance on oil exports also makes its currency sensitive to global energy price shifts.