• USD/CAD extends gains to the 1.3920 area from 1.3845 lows on Tuesday.
• Risk aversion amid higher global yields and rising tensions in Iran is boosting the safe-haven USD.
• Soft US manufacturing and jobs data has failed to dent hopes of a Fed rate hike in September.

The Canadian Dollar (CAD) depreciates against the US Dollar (USD) for the second consecutive day on Wednesday, weighed by growing risk aversion as global yields rise to multi-year highs and with expectations of an immediate Federal Reserve (Fed) rate hike providing additional support to the Greenback. The USD/CAD pair has reached fresh two-week highs above 1.3920 ahead of the Bank of Canada’s (BoC) interest rate decision.

The US Dollar has regained its safe-haven status this week, as the rally in global yields pressures central banks to tighten their monetary policies and curbs investors’ appetite for risk. Beyond that, tensions in the Middle East have escalated, following a month of tense calm, altogether contributing to the risk-off market mood.

Later on Wednesday, 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. This event is unlikely to provide any significant support to the Canadian Dollar.

Markets keep Fed tightening expectations elevated

In the US, data released on Tuesday showed that the ISM Manufacturing Purchasing Managers Index (PMI) slowed down beyond expectations in August and JOLTS Job Openings grew below forecasts in July. These figures, however, failed to dent the US Dollar’s recovery as investors remain confident that the Federal Reserve (Fed) will hike interest rates at its September meeting.

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.”

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.