The Canadian dollar gained ground against the U.S. dollar on Wednesday, supported by a notable jump in oil prices and growing market estimates that the Bank of Canada could raise interest rates before year-end.
The currency traded 0.2% stronger at 1.4170 per U.S. dollar, equivalent to 70.57 U.S. cents, after moving between 1.4156 and 1.4210 during the session. The intraday range highlighted some of the volatility that accompanied the broader market moves.
Oil, a key export for Canada, climbed sharply in tandem with the currency move. U.S. crude rose 5.2% to $74.10 a barrel after U.S. President Donald Trump said an interim agreement to end the war with Iran was "over" and indicated the United States was likely to launch new strikes on Wednesday night. The jump in crude prices contributed to renewed worries about the inflation outlook.
Those inflation concerns and the related threat of tighter monetary settings weighed on equity markets worldwide, with stock indices declining as investors reconsidered economic and policy trajectories in light of higher energy costs.
Market pricing reflected a material change in expectations for Canadian monetary policy. Swap market data showed investors now put roughly a 60% probability on a Bank of Canada rate increase this year, up from about 40% on Tuesday. That shift in odds supported the loonie by raising the prospect of relatively firmer Canadian interest rates compared with peers.
Strategists at Scotiabank noted the currency's resilience amid the recent volatility. "The CAD has performed relatively well through the overnight volatility," Shaun Osborne and Eric Theoret said in a note. "Negative CAD sentiment is moderating but spot remains quite elevated." Their comment suggests that while sentiment has improved, market positioning still reflects heightened sensitivity.
In sum, the combination of a stronger oil price backdrop and increased market-implied chances of a Bank of Canada tightening helped lift the Canadian dollar, even as global equities retreated on renewed inflation and policy concerns.