Canadian Dollar Hits 4-Week High as Yield Gap Narrows
Key Facts
The Canadian dollar hit a 4-week high during trading on Tuesday, 20 October 2026, according to Reuters, supported by a narrowing yield gap with the United States and growing bets on a Canadian interest rate hike. Alberta's rejection of secession provided additional support for the currency, alongside higher oil prices, which the agency cited among the reasons for its advance. The camp backing remaining in Canada secured 76% of the votes counted in the referendum, according to results reported by Reuters during the session. In the bond market, the yield gap between Canadian and U.S. 2-year debt narrowed to 146 basis points. The gap had stood at about 160 basis points earlier in October, according to the comparison cited by the agency.
Oil's support for the Canadian currency followed gains in Brent futures during the session on Friday, 16 October, according to Investing.com data. The contracts rose 3.72% that day to end the session at $109.86 a barrel. During morning trading on Tuesday, Brent approached $112 a barrel, according to a subsequent update from the Associated Press. The price then fell below $109 a barrel later in the same session. Among Canadian companies, the Bank of Canada's Business Outlook Survey found that improved export sales expectations were driven primarily by "strong U.S. demand and higher oil prices."
The currency's rise coincided with Canadian annual inflation accelerating to 3.1% in September from 3% in August, according to Reuters. September's reading was below the expectations of respondents to the agency's poll, who had forecast inflation of 3.2%. In a breakdown of prices, Royal Bank of Canada analysis showed energy prices rose 19% from a year earlier. Annual energy price growth had been 15.4% in August before accelerating in September. By contrast, inflation excluding gasoline slowed to 2.2% year on year from 2.4% in August, according to Desjardins analysis, with the measure moving in the opposite direction to headline inflation.
In the swaps market, the priced-in probability of a Bank of Canada rate hike at its next meeting reached 80%, according to Reuters' account of Tuesday's trading. In the government bond market, the yield on Canadian 10-year debt fell 4.7 basis points in the agency's morning report. The decline brought the yield to 3.915%, alongside strength in the Canadian currency during the session. In a separate survey of consumer expectations, the Bank of Canada said long-term inflation expectations rose during the quarter. Those expectations moved closer to short-term inflation expectations, which were already elevated, according to the survey results.
On economic activity, the Bank of Canada's business survey showed a shift in companies' responses following the collapse of trade talks. Sentiment among companies that responded after the talks collapsed was weaker than among those surveyed beforehand. Export sales expectations among the later group were also lower than those of companies that responded earlier, according to the bank. Among households, consumer spending plans deteriorated from levels the bank described as already weak in its survey of their expectations. That decline occurred despite improvements in consumers' financial situations and perceptions of the labour market, according to the same findings.
The Bank of Canada had held its target overnight rate at 2.25% in its previous decision on 2 September 2026. The next Canadian retail sales release is scheduled for Friday, 23 October, according to Scotiabank's economic calendar. The release covers August sales, according to the calendar entry. It will be followed by the Bank of Canada's interest rate decision on 28 October 2026, according to the bank's official schedule. The bank is also scheduled to release its Monetary Policy Report that day alongside the rate announcement.