The Canadian dollar touched a three-month high (USD/CAD low) on Thursday after lower-than-expected CPI inflation numbers were reported in the US on Wednesday. However, the Canadian dollar’s momentum quickly dissipated. This appears to be more a case of broad US Dollar weakness rather than Canadian dollar strength, as the broader USD index has lost 1.6% to date in June. The weakening US dollar is a result of increased expectations that the FED will begin its rate-cutting cycle in September, with the market pricing in approximately a 90 percent chance that the FED will cut rates in September (up from about 70% on Wednesday). This view was further reinforced by Chicago FED President Austan Goolsbee, whose dovish comments on Thursday indicated that, in his opinion, the US economy is on track to reach 2% inflation. These are some of the first signals from policymakers that a rate cut is coming.
In early Friday trading, the Canadian dollar was taking yet another run at breaking through the 1.36 mark, propelled by higher oil prices as WTI oil prices gained for the third straight trading session. However, given that there is no significant economic data scheduled in Canada for this week, the Canadian dollar will likely continue to trade in the relatively tight range it has been in since April. Next week’s economic data schedule is much more meaningful, with the latest Canadian inflation numbers on Tuesday and retail sales data on Friday.
The big picture outlook here is that the broad US Dollar strength that characterized the first half of the year, supported by higher inflation and strong employment, appears to be waning. As a result, over the next few months, there will be a revaluation of the USD/CAD pairing. However, the ‘big move’ might not come until the FED actually moves forward with its cut. Until then, you can expect small and steady increases in the value of the Canadian dollar versus the US dollar.
The Canadian dollar is currently trading at 1.3613 CAD against the US Dollar.
