The US dollar edged higher against the Canadian dollar in Asian trading on Tuesday (October 27), currently trading around 1.4020. The rise was driven by continued strength in the US dollar, fueled by cautious market sentiment ahead of Wednesday's Federal Reserve and Bank of Canada interest rate decisions.

The Federal Reserve projects an 89.5% probability of keeping rates unchanged in October and an 82.3% probability of a rate hike in December.

Financial markets expect the Federal Reserve to keep interest rates unchanged at its upcoming October meeting, followed by a possible rate hike in December. According to the CME FedWatch tool, market pricing currently reflects an approximately 89.5% probability of keeping rates unchanged at the October policy meeting and an approximately 82.3% probability of a rate hike in December. Heather Long, chief economist at Navy Federal Credit Union, stated, "Inflation remains the number one problem for the U.S. economy, and there are many signs that inflation is becoming more widespread," adding, "For consumers, this means borrowing costs will be very high for the foreseeable future." However, she added, "Given that it's just before the election, they won't raise rates in October."

Oil prices were weighed down: Middle East diplomatic developments weighed on crude oil prices, putting pressure on the Canadian dollar.

The US dollar found support against the Canadian dollar, primarily as the commodity-linked Canadian dollar continued to be pressured by falling oil prices. Crude oil prices retreated significantly, and market sentiment was boosted by renewed diplomatic efforts in the Middle East, with investors hoping to prevent a further escalation of the US-Iran conflict. According to Iran's Islamic Republic Radio Television, representatives from Iran, Saudi Arabia, Pakistan, and Turkey agreed to continue security discussions and strengthen regional cooperation after high-level talks in Tehran on Monday. This joint statement, issued after the first meeting between Iran and senior officials representing the Mecca Joint Defense Agreement, clearly stated that the four countries would maintain dialogue and consultation, focusing on regional peace, security, and stability. Diplomatic progress eased market concerns about a sharp escalation of geopolitical conflict, thus limiting upside potential for oil prices. Weaker oil prices directly weakened the Canadian dollar's commodity currency attributes, making it weaker against the US dollar. This round of energy price corrections not only affected Canadian export revenue expectations but also further strengthened the relative advantage of the US dollar in cross-currency pairs.

Trade Stance: Carney says Canada's position in US-Canada trade negotiations remains unchanged.

Canadian Prime Minister Mark Carney stated unequivocally on Monday that the country's position in trade negotiations with the United States remains unchanged. Carney emphasized that any progress in the negotiations would be due to Washington moving closer to Canada's existing stance, rather than any concessions of principle from Canada. This statement signals Canada's firm and resolute stance on key issues, particularly concerning tariffs, market access, and supply chain arrangements. Carney's remarks help stabilize domestic expectations regarding the prospects of the trade negotiations and also convey to the market Canada's policy attitude that it will not easily compromise. Currently, US-Canada trade relations remain uncertain, and any softening of the position could trigger a repricing of bilateral trade arrangements in the market. Carney's reiteration of the position at this time is both a response to domestic politics and a strategic communication to consolidate Canada's bargaining power at the negotiating table.

The Bank of Canada anticipates that the market is pricing in an 85% probability of a rate hike this week, already incorporating four rate hikes up to September 2027.

Analysts at Commerzbank point out that Bank of Canada Governor Tiff Macklem's recent policy communications have substantially altered market expectations for the future path of interest rates. They stated, "Macklem's latest comments have significantly increased the risk of an imminent rate hike, therefore we expect the first action to occur before the end of this year." The analysts further noted, "Market participants are currently pricing in an approximately 85% probability of a rate hike this week, and given the recent more hawkish rhetoric, we also expect a rate hike," but cautioned, "Nevertheless, we believe this is premature given that core inflation remains subdued." Looking at the longer-term policy path, Commerzbank observes that the market has already priced in four rate hikes up to September 2027, highlighting the dramatic shift in market expectations regarding the Bank of Canada's policy outlook. The change in the governor's communication style has rapidly increased the probability of a near-term rate hike and significantly revised upwards expectations for the medium- to long-term interest rate path, reflecting a reassessment of the central bank's determination to combat inflation.

Summarize

The US dollar edged up to around 1.4020 against the Canadian dollar in Asian trading on Tuesday, supported by safe-haven demand ahead of the Federal Reserve and Bank of Canada's decisions on Wednesday. The market is pricing in an 89.5% probability of the Fed holding rates steady in October and an 82.3% probability of a rate hike in December. Oil prices fell due to developments in Middle East diplomacy, dragging down the commodity-linked Canadian dollar. Canadian Prime Minister Carney stated that Canada's position on US-China trade negotiations remains unchanged. Commerzbank noted that Macklem's recent statements have significantly increased the risk of a rate hike, with the market pricing in an 85% probability of a Bank of Canada rate hike this week, and already including four rate hikes up to September 2027. However, the bank believes that a rate hike this week is premature given low core inflation. The short-term exchange rate direction depends on the relative signals from the decisions of the two major central banks on Wednesday. (USD/CAD daily chart, source: EasyForex) At 14:01 Beijing time, USD/CAD was trading at 1.4018/19.