During Wednesday's Asian session (August 12), the USD/CAD pair staged a slight rebound, trading near 1.3930 after a three-day decline to 1.3914, its lowest level since June 10. The market is now awaiting the release of tonight's US CPI data, which will determine the near-term direction of the US dollar and the next move for USD/CAD. Oil prices have risen to a one-and-a-half-week high due to geopolitical risks, providing support for the Canadian dollar. However, expectations of a Federal Reserve rate hike and geopolitical uncertainty have fueled safe-haven demand for the US dollar, limiting the downside for USD/CAD.
Geopolitical risks are driving oil prices higher, bolstering the Canadian dollar. WTI crude oil futures are trading just below the one-and-a-half-week high set in the previous session, driven directly by escalating tensions in the Middle East. A senior advisor to Iran's Supreme Leader has explicitly stated that the Strait of Hormuz will not be reopened until the US meets Tehran's demands. This firm stance has significantly heightened market concerns about a potential disruption to global oil supplies. Concurrently, the Iran-backed Houthi rebels in Yemen have intensified attacks in the Red Sea and the Bab el-Mandeb Strait, specifically targeting vessels linked to Saudi Arabia. This has led to a notable increase in the shipping risk premium, further supporting oil prices. As a typical commodity currency, the Canadian dollar has a strong positive correlation with oil prices. Rising crude prices directly improve Canada's trade terms and energy export revenue outlook, providing fundamental support for the loonie and effectively capping the upside for USD/CAD. If the stalemate over the Strait of Hormuz persists or attacks in the Red Sea escalate further, oil prices could continue to climb, strengthening the Canadian dollar's relative resilience. The current geopolitical risk premium has become a key short-term support for the Canadian dollar. Even as the greenback benefits from safe-haven demand, the commodity-driven hedging effect prevents USD/CAD from moving significantly higher in a single direction. The market will closely track developments in Middle East negotiations and actual shipping traffic to assess whether this support can be sustained.
The CPI data has become a key short-term variable. Market focus has now fully shifted to tonight's release of the US July Consumer Price Index (CPI) data and Thursday's Producer Price Index (PPI) report. These two key inflation metrics will provide the latest guidance on the Fed's next monetary policy moves and directly influence demand for the US dollar and the short-term trajectory of USD/CAD. With reduced communication within the Fed and emerging policy differences, the CPI reading is the core basis for determining whether a rate hike is possible in September. The CME FedWatch Tool shows the market currently prices in a more than 75% probability of a rate hike by the end of the year. This expectation, coupled with geopolitical uncertainty, provides additional support for the safe-haven US dollar, helping to limit the downside for USD/CAD. If tonight's CPI data comes in hot, particularly with core inflation exceeding expectations, it will further strengthen rate hike expectations, pushing up US Treasury yields and the US dollar, which could pressure the Canadian dollar. Conversely, if the data is mild or soft, it could undermine the dollar's rate advantage, giving USD/CAD downward momentum. Overall, the CPI outcome will determine the short-term direction of the US dollar's strength, making it a key variable for USD/CAD volatility.
In its latest foreign exchange outlook for August, ING noted that Canada's inflation outlook is relatively moderate, with core inflation already below expectations and approaching the 2% target. Even with a rebound in energy prices in July, the risk of second-round effects remains limited. It forecasts the peak inflation rate for the year to be only 2.7%. Therefore, the Bank of Canada is unlikely to raise rates before mid-2027, while the market still prices in about 15 basis points of tightening by year-end. ING anticipates a dovish repricing by the Fed in the coming months, an environment that has historically been relatively unfavorable for the Canadian dollar. However, broader US dollar weakness should still be sufficient to push USD/CAD down to 1.38 by year-end.
In its August report, the National Bank of Canada pointed out that the US dollar's momentum has weakened following the much weaker-than-expected July non-farm payrolls report, where job growth turned negative and prior months were revised lower. This reinforces the signal of a softening labor market and reduces the likelihood of the Fed tightening again soon. However, inflation remains stubbornly high, preventing the Fed from quickly pivoting to an accommodative stance. Favorable interest rate differentials and geopolitical tensions will continue to support the US dollar in Q3. Regarding the Canadian dollar, the National Bank of Canada noted that employment resilience, a pick-up in economic activity, and stronger oil prices have pushed the trade balance back into surplus. The domestic outlook is showing marginal improvement, but the interest rate gap between the Bank of Canada and the Fed remains wide, inflation is under control, and trade uncertainty is rising following the CUSMA review. There is a lack of a clear catalyst in the near term. The bank maintains a constructive view on the Canadian dollar in the medium term, especially in the context of Canada's growth-supportive policies that encourage investment, but the timeline is more dependent on progress in North American trade negotiations. The baseline scenario remains one of the US dollar gradually weakening by year-end.
In summary, USD/CAD has staged a slight rebound from its lowest level since June 10 at 1.3914, currently trading near 1.3930, finding a temporary respite after three consecutive days of decline. Oil prices have risen to a one-and-a-half-week high due to geopolitical risks—the senior advisor to Iran's Supreme Leader stated that the Strait of Hormuz will not be reopened until the US meets its demands, and the Houthi rebels have escalated attacks in the Red Sea—providing support for the Canadian dollar. However, the market has priced in a more than 75% probability of a Fed rate hike by year-end, combined with geopolitical uncertainty, which fuels safe-haven demand for the US dollar, limiting the downside for USD/CAD. The market is now waiting for tonight's US CPI data, which will determine the short-term direction of the US dollar and the next move for USD/CAD. If the CPI is mild, the US dollar could come under pressure, potentially pushing USD/CAD lower to test 1.3900. If the CPI exceeds expectations, rate hike expectations will rekindle, and USD/CAD could rebound. The pair is expected to trade in a range until the data and geopolitical news become clearer. (USD/CAD daily chart, source: EasyFX) At 13:20 Beijing time on August 12, USD/CAD was quoted at 1.3930/31.
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