Canadian Dollar Struggles Amid US PPI Data and Trade Tensions

The Canadian Dollar (CAD) is trading under pressure despite higher oil prices supporting its value. The US Dollar (USD), on the other hand, has lost momentum after staging a modest recovery.

According to recent data from the US Producer Price Index (PPI), producer inflation picked up again in August, rising 0.4% month-over-month 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.

The PPI figures keep the possibility of a Federal Reserve (Fed) rate hike firmly on the table. 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.' 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.'

The market-implied odds of a return to normal by year-end have fallen below 30%, from more than 50% previously. This keeps a geopolitical risk premium embedded in both oil and gold, providing support for the Canadian dollar.