The Canadian dollar weakened slightly to around 1.41 per US dollar in September, its lowest level in more than a month, as expectations point to a widening interest-rate differential between the US and Canada. Markets expect the Federal Reserve to continue tightening while the Bank of Canada holds rates steady. The Fed raised its federal funds target range at its latest meeting, reinforcing the US dollar’s advantage over the loonie. Meanwhile, the BoC kept its key policy rate unchanged at 2.25% in September. Elevated oil prices continue to put upward pressure on Canadian inflation, although this could be offset by economic slack stemming from trade tensions with the US. Canadian retail sales likely increased 1.3% month over month in August, rebounding from a decline in July, according to estimates. This would mark the strongest gain since January and could signal resilient domestic demand.

CAD Weakens on Widening US-Canada Rate Gap

The Brazilian real strengthened slightly to 5.12 per US dollar in September following the release of stronger-than-expected mid-month inflation. Brazil’s mid-month headline inflation rose to 4.47% year over year in September from 4.24% previously, exceeding the 4.30% market consensus. Persistent inflationary pressures could reduce prospects for the continuation of the Selic easing cycle. The 12-month rate is back above the upper bound of the BCB’s target range. The BCB cut its policy rate by 25 bps to 13.75% at its September meeting and left its next steps open, while Copom’s minutes were more hawkish than expected. Abroad, oil prices fell, easing some energy-related pressures, although the external environment remained challenging as global yields rose above recent historical levels before halting their rally on the oil pullback. The US Fed raised its federal funds target rate at its latest meeting. The narrowing interest-rate differential remains a factor supporting the dollar.

Brazilian Real Strengthens Following Inflation Data

Brazil’s 10-year government bond yield fell to 14.1% in late September as falling oil prices halted a sharp sell-off in global bonds. Lower oil prices tempered inflation concerns, pausing the broader bond-market sell-off, amid expectations of progress in diplomatic efforts between Iran and the US. Meanwhile, domestic factors put upward pressure on yields, as Brazil’s mid-month headline inflation rose to 4.47% year over year in September from 4.24% previously, exceeding the 4.30% market consensus. Persistent inflationary pressures could reduce prospects for the continuation of the Selic easing cycle. The BCB cut its policy rate by 25 bps to 13.75% at its September meeting and left its next steps open, while Copom’s minutes were more hawkish than expected. A recent election poll also showed President Lula maintaining a numerical lead over Flávio Bolsonaro in a potential second-round runoff.

Brazil 10-Year Yield Falls as Global Surge Eases

Canada’s 10-year government bond yield eased to around 3.92% after touching a near three-year high of 4% on September 24th, as falling oil prices halted a sharp sell-off in global bonds. Lower oil prices tempered inflation concerns, pausing the broader bond-market selloff. Expectations that diplomatic efforts involving Iran and the US could make progress toward reopening the Strait of Hormuz drove oil lower. The latest decline in the 10-year yield therefore marks a partial reversal of the week’s bond-market selloff, although yields remain substantially above levels seen earlier in September. The BoC also faces inflation concerns as energy prices remain elevated. Meanwhile, Canadian retail sales likely increased 1.3% month over month in August, rebounding from a decline in July, according to estimates. This would mark the strongest gain since January. Stronger retail sales could signal resilient domestic demand, adding further upward pressure on yields.

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CAD Weakens on Widening US-Canada Rate Gap

Brazilian Real Strengthens Following Inflation Data

Brazil 10-Year Yield Falls as Global Surge Eases

Canada 10-Year Yield Eases From 3-Year High