USD/CAD falls toward 1.3850 due to potential US recession, persistent inflation

• USD/CAD declines as the US Dollar faces pressure from investor concerns, leading to a shift away from US assets.

• The Greenback encounters further challenges due to escalating trade tensions between the US and China.

• The commodity-linked CAD may struggle as crude Oil prices remain subdued.

USD/CAD continues its losing streak for the fourth straight session, hovering around 1.3860 during Monday's Asian trading hours. The decline is driven by a weakening US Dollar (USD), pressured by investor concerns over a potential recession and persistent inflation, prompting a shift away from United States’ (US) assets.

The Greenback also faces additional headwinds from rising trade tensions between the US and China, which have reignited fears of a global economic slowdown. On Friday, China’s Ministry of Finance announced a steep increase in tariffs on US goods, raising duties from 84% to 125%. This move followed President Trump’s earlier decision to hike tariffs on Chinese imports to 145%.

Economic data released late last week added to the cautious mood. The University of Michigan’s consumer sentiment index dropped to 50.8 in April, while one-year inflation expectations surged to 6.7%. Meanwhile, the US Producer Price Index (PPI) rose 2.7% year-over-year in March, easing from 3.2% in February, with core inflation cooling to 3.3%. Initial jobless claims edged higher to 223,000, although continuing claims fell to 1.85 million, painting a mixed picture of the labor market.

Speaking on CBS' Face the Nation on Sunday, Minneapolis Fed President Neel Kashkari commented on the trade dispute's impact: “This is the biggest hit to confidence that I can recall in the 10 years I’ve been at the Fed—except for March 2020 when COVID first hit.” Kashkari emphasized that the economic fallout would largely depend on how swiftly trade tensions are resolved.

Although President Trump’s announcement of a 90-day truce offered a glimmer of hope for renewed negotiations, broader concerns about the US economic outlook have prompted capital flows toward Canada, strengthening the Canadian Dollar (CAD).

However, the commodity-linked CAD may face some headwinds as Oil prices remain subdued, given that Canada is the largest Oil exporter to the US. West Texas Intermediate (WTI) crude Oil is trading lower at around $60.70 per barrel amid worries that escalating US-China trade tensions could hamper global growth and reduce fuel demand.