Canadian Dollar strengthens despite subdued oil prices

USD/CAD loses ground for the second successive day, trading around 1.3920 during the Asian hours on Friday. The pair depreciates as the US Dollar (USD) declines following a softer-than-expected US inflation report. Market attention is now shifting toward the US July Retail Sales data scheduled for release later in the day.

Adding to the inflation picture, the Bureau of Labor Statistics (BLS) reported that US wholesale costs for goods and services were flat in July, cooling more than the anticipated 0.2% growth following a revised 0.1% decline in June. Excluding volatile food and energy components, the core Producer Price Index (PPI) rose 0.2%, coming in slightly below the market consensus of 0.3%. On an annual basis, headline PPI climbed 4.7% year-over-year in July, while core PPI increased 4.2% over the same period.

These cooling inflation metrics have shifted expectations regarding Federal Reserve policy. According to the CME FedWatch Tool, markets are now pricing in a 34.8% probability of a U.S. rate hike at the upcoming September meeting, down from 40% immediately following the PPI data release.

The downside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) may find challenges amid lower Crude oil prices. Oil prices edge lower as investors adopt a wait-and-see approach, closely monitoring diplomatic attempts to reopen the Strait of Hormuz.

Crude oil continues to flow out of the Persian Gulf despite the ongoing deadlock. Some tankers are actively sailing with their transponders switched off to mitigate risks, though vessels navigating the strait remain exposed to persistent threats. Meanwhile, the U.S. claims that up to 9 million barrels of oil per day are currently transiting the critical waterway, supported by the expanding capacity of U.S. forces to escort tankers.

Oil momentum cools but TD Securities still sees upside ahead

According to TD Securities, the recent loss of "easing near-term momentum has also catalyzed modest selling in WTI crude on the day." Even so, the bank underscores that "fundamental tightness across crude and product markets should ultimately support further upside," suggesting that the latest pullback is more a function of short-term flow dynamics than a shift in the underlying supply-demand backdrop.