Canadian Dollar struggles as stronger PMIs support US Dollar

• USD/CAD trades around 1.4095 on Friday, up a modest 0.06% at the time of writing.
• July US PMI data points to stronger business activity, supporting the US Dollar.
• Canadian producer and raw material prices decline sharply, while lower Oil prices continue to weigh on the Canadian Dollar.

USD/CAD trades around 1.4095 on Friday at the time of writing, up a modest 0.06% as the US Dollar (USD) retains a slight advantage following the release of solid US economic data, while the Canadian Dollar (CAD) remains pressured by weak domestic indicators and softer Oil prices.

The United States (US) S&P Global Composite Purchasing Managers Index (PMI) rose to 53.6 in July from 51.9 in June, signaling an acceleration in private sector activity. The Services PMI improved to 53.6, while the Manufacturing PMI eased slightly to 53.8 from 53.9. According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, the survey is consistent with annualized Gross Domestic Product (GDP) growth of around 2% in the third quarter, although supply chain disruptions and price pressures continue to intensify.

The stronger-than-expected data highlights the resilience of the US economy and helps support the US Dollar, although the immediate market reaction remains limited. Investors are now focused on next week's Federal Reserve (Fed) policy meeting for further guidance on the monetary policy outlook.

In Canada, Friday's data pointed to renewed weakness in producer prices. The Industrial Product Price Index fell 1.4% MoM in June after a revised 1.4% increase in May, while the Raw Material Price Index dropped 6.9%, well below market expectations. These figures add to the recent softer inflation data, reinforcing expectations that the Bank of Canada (BoC) could maintain a more accommodative policy stance than the Fed.

Meanwhile, lower Oil prices continue to cap support for the Canadian Dollar. The weakness in the energy market, combined with diverging monetary policy expectations between the Bank of Canada (BoC) and the Federal Reserve (Fed), as well as uncertainty surrounding the Trump administration's new tariffs, continues to provide a mildly supportive backdrop for USD/CAD in the near term.

CAD steadies as modestly better fundamentals offset trade tension overhang

Strategists at Scotiabank observe that the Canadian Dollar is essentially unchanged on the day, noting that “the CAD is all but flat on the session.” They judge the backdrop to be “a little more positive for the CAD in late week trading as US yields edge off their highs and front-end spreads narrow,” but caution that sentiment remains fragile. In their view, “the CAD may still struggle to gain support as trade tensions linger,” with PM Carney signalling that Canada is “weighing all options for possible retaliation if there is no agreement to avoid 50% tariffs next month.” From a technical standpoint, Scotiabank maintains a “neutral—there is still no real change in the CAD’s technical condition” stance, highlighting that “spot is pivoting around the 40-day MA (which has nudged up to 1.4081 this morning) and it remains well below USD resistance at 1.4125 and above initial support at 1.4060.”