The Bank of Canada raised its benchmark policy rate by 25 basis points to 2.50% on Wednesday, in contrast to a hold from the Federal Reserve. This divergence narrowed the 2-year government bond yield gap between the two nations down to roughly 128 basis points. Meanwhile, crude oil settling at $102 a barrel bolstered the currency despite domestic fiscal headwinds, including Ontario forecasting a wider deficit linked to business tax relief and tariff-related spending.
Key points
A quarter-point rate increase by the Bank of Canada helped shrink the cross-border yield…: A quarter-point rate increase by the Bank of Canada helped shrink the cross-border yield spread with the United States.
Softer U.S. Treasury yields following in-line domestic inflation data weighed broadly on…: Softer U.S. Treasury yields following in-line domestic inflation data weighed broadly on the American currency.
Ontario expects a larger budget deficit and a delayed return to balance due to business t…: Ontario expects a larger budget deficit and a delayed return to balance due to business tax cuts and tariff aid.
Sources checked by our analysis pipeline: 1
By Fergal Smith
TORONTO, Oct 29 (Reuters) - The Canadian dollar strengthened to a six-week high against its US counterpart on Thursday after the start of a Bank of Canada tightening cycle helped narrow the gap between Canadian and US bond yields.
The loonie was trading 0.1% higher at 1.3982 per US dollar, or 71.52 US cents, after touching its strongest intraday level since September 16 at 1.3966.
* The gap between Canada's 2-year yield and the US equivalent narrowed by 4.7 basis points to about 128 basis points in favor of the US note. It was as much as 160 basis points earlier this month, the widest gap since February 2025.
* On Wednesday, the Bank of Canada hiked its key interest rate by 25 basis points to 2.50% and said further increases might be needed to prevent soaring energy costs from driving broader inflation, while the Federal Reserve left its policy rate on hold.
* The yield spread move was "giving traders conviction to chase further gains for the loonie," said Amo Sahota, director at Klarity FX in…
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