Bank of Canada rate cut expectations suppress Canadian dollar; investors focus on monetary policy divergences.

On Wednesday, the Canadian dollar weakened against the US dollar as investors anticipated that the Bank of Canada would further lower its benchmark interest rate below the key rate of the Federal Reserve at next week's monetary policy meeting. The Canadian dollar fell by 0.3% to $1.4360 USD, or 69.64 cents per Canadian dollar, with a daily trading range between 1.4302 and 1.4391. The day before, the Canadian dollar reached a near five-year low of 1.4515 due to President Trump's announcement of considering imposing a 25% tariff on Canadian goods starting February 1. "Today's market activity seems unrelated to tariffs," said Tony Valente, a senior forex trader at AscendantFX. "The market is more reflecting the increasing awareness of monetary policy divergence. Yesterday's lower inflation data in Canada paved the way for a rate cut at the upcoming policy meeting next week, while the Federal Reserve may keep rates unchanged." Data showed that Canada's annual inflation rate in December fell to 1.8%. Investors are expecting an 80% chance that the Bank of Canada will cut rates by 25 basis points to 3% at the meeting on January 29. If this expectation is met, Canada's policy rate will be 150 basis points lower than the upper limit of the Federal Reserve's 4.25%-4.50% range, a historically significant difference. Canada's November retail sales data will be released on Thursday, providing more clues to the domestic economic situation. Economists expect a monthly sales growth of 0.2%. Meanwhile, the US dollar strengthened against a basket of major currencies, and the price of crude oil, a major Canadian export, fell to a 12-day low, further pressuring the Canadian dollar. In the bond market, Canada's 10-year government bond yield rose by 4.1 basis points to 3.304%. Previously, the yield hit its lowest level since January 3 at 3.218% on Tuesday.