The Canadian dollar is having its best run since the spring, and the bond market is the reason. Reuters reported that the loonie traded 0.1 percent higher at 1.3982 per US dollar on Thursday, after touching 1.3966 intraday, its strongest level since September 16. Bloomberg reporting carried in the morning pool described the currency as poised for its best month since April.
The mechanism is the front end differential. The Bank of Canada raised its policy rate by 25 basis points to 2.50 percent on Wednesday and said further increases might be needed, while the Federal Reserve held at 3.75 to 4.00 percent. The gap between Canada’s two year yield and the US equivalent narrowed by 4.7 basis points to about 128 basis points in the US note’s favour, down from as much as 160 basis points earlier in October, the widest since February 2025. Canada’s 10 year yield was down half a basis point at 3.853 percent on the day.
A 128 basis point gap is still a substantial yield penalty for holding Canadian dollars. What changed is the direction and the expected path: a central bank at the start of a tightening cycle, with its next decision on December 9, against a Fed whose own tightening is a contested question for December. Each meeting that Ottawa moves and Washington does not compresses the differential that has weighed on the currency for two years.
This site’s tables show the move extending into Friday morning, with USD/CAD at 1.3957. The risks to the trade are the same ones in the Bank of Canada’s own statement: the economy still carries excess supply, unemployment is around 6.5 percent, and the hike was a pass-through insurance policy rather than a response to demand strength. If the December data let the bank pause, the differential stops narrowing and the loonie’s best month since April becomes a level to sell into rather than a trend. For now, the rates market is paying Canada more, and the currency is collecting.