The USD/CAD pair extended its losing streak into a third consecutive trading session on Tuesday, slipping below the 1.3630 mark. The weakening of the Loonie is primarily driven by diminished short-term demand for the US Dollar (USD) due to strong expectations that the Federal Reserve (Fed) will begin cutting interest rates in September.
The anticipation of Fed rate cuts has bolstered the appeal of riskier assets, reflected in the solid performance of S&P 500 futures during the European session, signaling a positive risk appetite among investors. Meanwhile, the US Dollar Index (DXY), which measures the Greenback against six major currencies, hovers near a seven-month low at 101.77, while 10-year US Treasury yields remain around 3.87%.
As the Fed appears poised to shift towards policy normalization in September, market participants are keenly watching for signals on whether this transition will be gradual or involve a more aggressive 50 basis point (bps) rate cut. Investors are particularly focused on the upcoming Federal Open Market Committee (FOMC) minutes and Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium on August 22-23 for further guidance.
On the other hand, the Canadian Dollar (CAD) continues to outperform despite the ongoing decline in oil prices. Expectations of a ceasefire between Iran and Israel, coupled with China’s weak economic outlook, have put significant downward pressure on oil prices. As Canada is the largest energy exporter to the United States, falling oil prices can lead to reduced foreign investment flows into the country.
Looking ahead, the movement of the Canadian Dollar will be closely tied to the upcoming release of Canada’s Consumer Price Index (CPI) data for July, set for Wednesday. Economists predict that the headline CPI will have risen at a slower rate of 2.5%, down from 2.7% in June, with monthly inflation expected to increase by 0.3% following a previous decline. If inflation continues to ease, it could heighten speculation of further interest rate cuts by the Bank of Canada (BoC).
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