Canadian Dollar weakens against US Dollar ahead of key US inflation data

• USD/CAD advances around 1.3820 on Thursday as investors await US producer inflation data.
• An acceleration in producer inflation could reinforce expectations of a US interest-rate hike.
• Higher Oil prices support the Canadian Dollar and limit the pair’s advance.

USD/CAD trades around 1.3820 on Thursday at the time of writing, up 0.11% on the day. The pair edges higher as investors await the release of the United States (US) Producer Price Index (PPI) data for August, scheduled for 12:30 GMT.

The inflation data is expected to play an important role in shaping expectations surrounding the Federal Reserve’s (Fed) next policy decision. The headline PPI is expected to accelerate to 5.3% YoY in August from 4.7% in July, while the core index, which excludes volatile food and energy components, is forecast to rise to 4.6% from 4.2% previously.

Stronger-than-expected figures could fuel concerns about persistent inflationary pressures and reinforce expectations that the Fed will raise interest rates at its upcoming meeting. According to the CME FedWatch tool, markets currently price in a 61% chance of a rate hike at the September meeting.

This prospect provides some support to the US Dollar (USD), which also benefits from escalating geopolitical tensions between the United States and Iran. US Treasury yields remain elevated, further helping to limit downside pressure on the Greenback.

However, the USD/CAD advance remains capped by the strength of the Canadian Dollar (CAD). Higher Oil prices support the Loonie, as Canada is a major energy exporter. Crude Oil prices are benefiting from supply concerns following a fresh escalation of tensions around the Strait of Hormuz.

Investors will then turn their attention to the US Consumer Price Index (CPI) data for August, due on Friday. The release could provide further clues about the inflation outlook and determine whether markets strengthen or scale back expectations of further monetary tightening from the Fed.

CAD holds firm as US trade measures fail to rattle USD/CAD downtrend

Strategists at Scotiabank describe the Canadian Dollar as “all but unchanged on the session, a stoic response to the latest developments in the US/Canada trade spat.” They note that the CAD initially “pushed higher in early trade yesterday as markets chewed over President Trump’s weekend post on ‘Canada’s (currency) dollar imbalance’ but ultimately concluded, as we did ourselves, that there was not too much to read into the comment from the CAD perspective at this point.” Scotiabank adds that “if the White House does have a beef with the low CAD, some further clarity is required,” pointing out that news “late yesterday that the president was banning some Canadian dairy, alcohol and motorcycle goods has had little impact on the CAD,” even though “these latest US measures come into force on September 29th.” Instead, they stress that “underlying CAD fundamental drivers continue to improve,” with their “fair value estimate for spot” having “edged down to 1.3736 today.”

On the technical side, Scotiabank characterizes the backdrop as “bearish—USDCAD is maintaining a tight range on the day but underlying technical dynamics are USD-bearish.” They highlight that “USD gains from the late August low stalled and reversed last week,” which “sets firm resistance in the low/mid 1.39 zone and suggests the USD downtrend from the mid-year peak is resuming.” Moreover, “trend momentum is USD-bearish across short-, medium-, and long-term studies, meaning that moderate USD gains (through the mid-1.38s) are likely to draw selling interest.” In their view, “USD support is 1.3715/35 ahead of the decline back to the 1.3500/50 region.”