Canadian Dollar extends losses ahead of BoC's monetary policy decision

• USD/CAD hits fresh two-week highs above 1.3930 amid broad-based US Dollar strength.
• The Bank of Canada is expected to leave rates on hold later on Wednesday and hint at a steady policy ahead.
• Risk aversion amid rising US-Iran tensions and hopes of a Fed rate hike are buoying the Greenback.

The Canadian Dollar (CAD) depreciates against the US Dollar (USD) for the second consecutive day on Wednesday, as risk aversion and market expectations of an immediate Federal Reserve (Fed) rate hike keep underpinning USD's rally. The USD/CAD pair trades at two-week highs above 1.3930 as the focus shifts to the Bank of Canada's (BoC) interest rate decision.

The BoC is widely expected to leave its benchmark interest rate on hold at 2.25%, and, most likely, through the rest of the year, as the tariff rift with the US and the uncertainty surrounding the Middle East conflict cast serious doubt on the country's economic outlook.

Markets keep Fed tightening expectations elevated

This view contrasts with the hawkish repricing of the Fed's monetary policy, triggered by Chairman Kevin Warsh's speech at the Jackson Hole meeting on Friday, in which he affirmed that the central bank has "work to do" to bring inflation to the 2% target.

Strategists at Brown Brothers Harriman note that Fed funds futures now “price in 67% odds of a 25bps hike on September 16 and imply 60bps of tightening over the next twelve months.” Looking ahead, they expect that this “pricing will remain elevated into the September meeting, with the August CPI on September 11 the decisive test.”

Beyond that, the US Dollar has regained its safe-haven status this week, as the rally in global yields put investors on their toes, while escalating tensions in the Middle East have dampened risk appetite further.

On Wednesday, the focus will be on the US ADP Employment report, which is expected to show a net increase of 47K in private payrolls in August, following a 44K increase in July.