Canadian Dollar at 1.4050 Ahead of Rate Decision, with Hike to 2.50% Seen as Likely
Key Facts
The Canadian dollar fell 0.3% to 1.4050 against the U.S. dollar on 27 October, extending its retreat from a five-week high of 1.3966 recorded on 23 October, according to a Reuters report. The move came ahead of the Bank of Canada’s interest rate decision and Monetary Policy Report on 28 October. Investors saw a nearly 75% chance of a 25-basis-point rate hike to 2.50%, the report said. A Reuters poll published on 23 October showed that a majority of participating economists expected the same increase. Domestic data are taking on added importance as the decision approaches: retail sales grew in August, while investors await an advance estimate of economic activity for the following month.
In its market reading, Reuters said lower oil prices and investor caution ahead of the decision weighed on the Canadian currency. The report quoted a trader as saying investors were taking some profits ahead of a pivotal day. These moves put the currency in a different context from the USD/CAD pair’s close in EL7 data, which stood at 1.40515 on 27 October and then 1.40626 on 28 October. These closes measure the amount of Canadian dollars needed to buy one U.S. dollar. According to Reuters, a 25-basis-point hike would be the first increase since July 2023.
In a Reuters poll published on 23 October, 16 of 29 economists expected a further hike before the end of March 2027, followed by the overnight rate holding at 2.75%. That expected path follows the increase the poll predicted for the 28 October decision, from 2.25% to 2.50%. The Bank of Canada had kept its overnight rate target at 2.25% in its previous decision, issued on 2 September. These figures remain the poll participants’ expectations, while the bank sets its course through official decisions. The number of participants reflects that a further hike was not a shared view among all the economists surveyed.
On economic activity, retail sales rose in August, but the increase was below Statistics Canada’s advance estimate, according to Dow Jones coverage cited in the draft correction. The official source does not confirm a forecast of 1%, so the result cannot validly be compared with that figure. Reuters reported that sales growth came from vehicles and fuel, while core sales increased at a slower pace. This divergence separates the effect of specific categories on total spending from the pace of core sales. The reading offers a signal on spending ahead of the decision, but on its own does not settle the monetary policy path.
In September, the Bank of Canada said consumer price inflation had remained near 3% in recent months and that inflation excluding gasoline was 2.2%, while core inflation measures remained close to 2% in July. The bank also said new U.S. tariffs and Canadian counter-tariffs had increased uncertainty around the growth outlook, while inflation risks had risen as oil prices remained high. The bank said, "The risks of higher inflation have increased, while new tariffs make the growth outlook more uncertain." These considerations provide the backdrop to the bank’s interest rate decision and Monetary Policy Report. The decline in oil on 27 October also put the currency up against a market factor preceding the decision, alongside the bank’s concerns about the effect of high prices on inflation.
The Bank of Canada was scheduled to release its interest rate decision and Monetary Policy Report on 28 October at 09:45 Eastern time, with Governor Tiff Macklem and Deputy Governor Carolyn Rogers set to hold a news conference at 10:30. Two days later, on 30 October, the advance estimate of Canadian GDP for August was scheduled for release. That timing puts the next growth data immediately after the bank’s decision, as markets await details of the report and officials’ explanations. The advance GDP reading provides a subsequent indicator of economic activity, following August retail sales data.