CAD Surges Amid Weaker US Inflation, Lower Rate Hike Odds
The Canadian Dollar (CAD) has been rising despite lower oil prices, which might seem counterintuitive given its commodity link. However, the USD/CAD pair's decline is also influenced by a softer-than-expected US inflation report.
The Bureau of Labor Statistics 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. 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. 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.
TD Securities still sees upside ahead for oil prices, suggesting that fundamental tightness across crude and product markets should ultimately support further upside. They attribute the recent loss of momentum to short-term flow dynamics rather than a shift in the underlying supply-demand backdrop.