C$ steadies as investors adjust Fed rate hike bets

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar was little changed against the greenback on Monday, clawing back its earlier decline, as investors adjusted bets on how much the Federal Reserve could raise interest rates this week and awaited domestic inflation data.

The Canadian dollar was trading nearly unchanged at 1.3260 per U.S. dollar, or 75.41 U.S. cents, after touching its weakest intraday level since November 2020 at 1.3344.

Reduced expectations that the U.S. central bank would lift its policy rate by 100 basis points rather than 75 basis points "explains a good portion of the risk sentiment/Canadian dollar rebound," said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull.

Money markets have fully priced the likelihood the Fed will deliver a 75-basis-point hike after the end of a two-day policy meeting on Wednesday, and about a 20% chance of an even larger move of 100 basis points.

Wall Street's main indexes steadied after sharp losses last week and the price of oil, one of Canada's major exports, rose as traders balanced fears that global demand could slow with worries about tight supplies. U.S. crude oil futures settled 0.7% higher at $85.73 a barrel.

Canadian inflation data for August, due on Tuesday, could help guide expectations for additional tightening by the Bank of Canada.

The underlying pressures driving inflation in Canada are likely to peak in the fourth quarter, economists told Reuters, though most see signs that fast rising price are becoming entrenched and warn a recession may be needed to avoid a spiral.

Canadian government bond yields fell further below the yields on U.S. government bonds. The 2-year differential grew by 7.9 basis points to 12.4 basis points, while the 10-year was 4.8 basis points greater at 34.8 basis points.

(Reporting by Fergal Smith; Editing by Nick Zieminski and Paul Simao)