The Canadian Dollar (CAD) remained supported on Thursday, despite a modest rebound in the US Dollar (USD) following a sharp selloff the previous day. The USD/CAD currency pair trimmed part of its earlier losses but continued to trade near a three-month low, around 1.3780 at the time of writing [1]. The strength in the Loonie was attributed to elevated Oil prices, with West Texas Intermediate (WTI) trading around $85.80 per barrel, up nearly 5% for the week, as ongoing US-Iran tensions fueled supply concerns. As Canada is a major crude exporter, the CAD is highly sensitive to Oil price movements [1].
Further supporting the Canadian Dollar were signs of progress in trade negotiations between the United States and Canada. US President Donald Trump paused planned 50% tariffs on approximately $20 billion worth of Canadian goods for three days, citing a deal between the two countries [1].
On the US side, the Greenback had fallen to a three-month low after the US Treasury announced larger buybacks of longer-dated government securities, which pushed long-term yields sharply lower. However, both the 10-year and 30-year Treasury yields rebounded on Thursday, as concerns over large fiscal deficits, heavy debt issuance, and persistent inflation risks kept upward pressure on borrowing costs. The US Dollar Index (DXY) recovered to around 98.80 from an intraday low of 98.56, its weakest level since May 14 [1].
Weekly US labor market data also provided support to the USD, with Initial Jobless Claims falling to 206,000 for the week ending August 15, below market expectations of 210,000 and the previous reading of 212,000 [1]. On monetary policy, Scotiabank strategists noted that the July FOMC minutes revealed that 'many' Federal Reserve policymakers judged that tighter policy would be needed if inflation did not decline. However, they also pointed out that recent signs of easing price pressures and some labor market softening suggest the risk of a September rate hike is lower than market-implied probabilities, which currently stand at a bit more than 30% [1].
In terms of currency performance, the Canadian Dollar was the strongest against the Japanese Yen, with a 0.58% gain, and also posted gains against the US Dollar (0.20%) and the Euro (0.14%) [1].
CONCLUSION
The Canadian Dollar's resilience is underpinned by rising Oil prices and easing US-Canada trade tensions, while the US Dollar finds some support from improved labor data and rebounding yields. Market sentiment remains cautiously optimistic for the CAD, with the risk of a near-term Fed rate hike perceived as relatively low.