The Canadian Dollar (CAD) strengthened to 1.4000 against the US Dollar (USD), marking a six-week low for the USD/CAD pair, following a broad-based weakening of the US Dollar after a sharp rally in the Japanese Yen (JPY) [1]. The USD/CAD pair traded around 1.3996 at the time of reporting, remaining under pressure for the third consecutive day [1]. This move was triggered by a nearly 480-pip plunge in USD/JPY, which fell below the key 160.00 level, fueling speculation of intervention by Japanese authorities to support the Yen [1].
The US Dollar's decline was further exacerbated by weaker-than-expected US second-quarter Gross Domestic Product (GDP) data and softer core Personal Consumption Expenditures (PCE) inflation, leading traders to reduce expectations for a September Federal Reserve (Fed) rate hike. The CME FedWatch Tool indicated a 55% probability of a 25-basis-point increase, down from approximately 60% prior to the data release [1]. Despite this, inflation risks remain as ongoing conflict in the Middle East disrupts energy supplies and keeps Oil prices elevated, which could prompt the Fed to maintain restrictive monetary policy for a longer period [1].
On Wednesday, the Fed kept interest rates unchanged at 3.50%-3.75% for the fifth consecutive meeting. Notably, three policymakers voted for an immediate hike, and Fed Chair Kevin Warsh reiterated the central bank's commitment to restoring price stability [1]. Meanwhile, higher Oil prices, with West Texas Intermediate (WTI) trading near $82.70 per barrel, continue to support the commodity-linked Canadian Dollar, given Canada's role as a major crude exporter [1].
Looking ahead, market participants are focused on Canada's monthly GDP data for May, scheduled for release on Friday [1]. Regarding the Bank of Canada (BoC), TD Securities described the July Summary of Deliberations as 'relatively balanced,' with policymakers noting that the economy is 'adjusting to recent shocks' but expressing concern about medium-term inflation expectations 'drifting higher.' TD also highlighted that US tariffs remain a persistent downside risk to growth, and the BoC minutes discussed potential policy responses if Oil prices 'increase and stay higher' [1].
CONCLUSION
The Canadian Dollar's recent strength is attributed to a combination of suspected Japanese intervention in the FX market, weaker US economic data, and elevated Oil prices. Market attention now shifts to upcoming Canadian GDP data and ongoing central bank deliberations, with inflation and energy prices remaining key factors for future policy direction.