Canadian Dollar firms as US Dollar loses momentum, Oil prices extend rally

USD/CAD pares earlier gains on Thursday as the US Dollar (USD) loses momentum after staging a modest recovery, despite US Producer Price Index (PPI) data showing that producer inflation picked up again in August. At the same time, higher Oil prices offer support to the Canadian Dollar (CAD). At the time of writing, the pair trades around 1.3815 after reaching an intraday high of 1.3835.

The US Producer Price Index (PPI) rose 0.4% MoM in August, matching market expectations and accelerating from the 0.1% increase recorded in July. Annual producer inflation climbed to 5.4%, slightly above the 5.3% forecast and up from 4.8%.

Core PPI, which excludes food and energy prices, rose 0.2% MoM, below the 0.3% expected and recorded previously. On an annual basis, core producer inflation increased to 4.6% from 4.3%, matching expectations.

The PPI figures keep the possibility of a Federal Reserve (Fed) rate hike firmly on the table. According to the CME FedWatch Tool, traders price in around a 64% probability of a 25-basis-point increase at the September 15-16 meeting. Traders now await Friday’s Consumer Price Index (CPI) report for a clearer signal on whether an interest-rate increase is likely next week.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 98.96 after reaching an intraday high of 99.20. The Greenback also draws little support from rising US Treasury yields. The benchmark 10-year yield trades around 4.92%, its highest level since November 2023.

West Texas Intermediate (WTI) Oil trades around $97.20 per barrel, up more than 8% so far this week. The Canadian Dollar is sensitive to movements in Oil prices because Canada is a major crude exporter.

Analysts at National Bank of Canada note that the Canadian Dollar has “appreciated strongly so far in Q3, supported by positive economic surprises and firmer oil and gold prices,” with “USD/CAD briefly falling below 1.38.” However, they caution that “the breakdown in Canada-US trade negotiations and the resulting increase in tariffs have materially increased downside risks to Canadian growth,” arguing that this shift in the backdrop leaves “scope for USD/CAD to retrace toward 1.40 in the near term before the loonie resumes its appreciation, assuming Canada-US trade talks ultimately lead to a favourable outcome.”

NBC also highlights the geopolitical underpinnings of the recent move, pointing out that “with tensions flaring up again in the Strait of Hormuz in August, market-implied odds of a return to normal by year-end have fallen below 30%, from more than 50% previously.” In their view, “that keeps a geopolitical risk premium embedded in both oil and gold, providing support for the Canadian dollar.”