Beyond Oil: The Real Reasons Behind CAD's Weakness

Today's expected range for the Canadian Dollar against the major currencies:

US Dollar        1.4060-1.4310

Euro                1.6050-1.6300

Sterling           1.8620-1.8870

WTI Oil (opening level) $69.27

The CAD/USD is opening at 1.4180 ( 0.7052 )

USD/CAD rolled over after its recent steep rally, after matching the 14-month high of 1.4248 earlier on Thursday. In the last two months the price of oil has been falling steadily, and we are now close to the prewar levels, as the risk premium is being removed. So why is the CAD so weak? The latest move seems exaggerated, if based on oil.

In the last month the only driver seems to be a shift in interest rate expectations in the USA, and the BoC comments that they are not going to change interest rate policy in Canada.

In my mind, the closer we get to the upcoming USMCA negotiations, and more news of Canada's weakening economy, we will be seeing the CAD in a weaker position on a regular basis. Since our biggest export to the USA (Oil) lowers in value.

Headlines

• Oil was on track for a weekly decline after transits through the Strait of Hormuz accelerated, although an attack on a cargo ship by an “unknown projectile” has renewed concerns about safe passage through the vital waterway. The attack on the container ship Ever Lovely has rattled the fragile confidence of shipowners and crews, though ships continued to transit through the narrow corridor on Friday.
• The US PCE deflator rose 0.45% in May, boosting the year-on-year inflation rate to 4.1% from 3.8%, while the monthly rate of core inflation rose 0.32%, lifting the year-on-year rate to 3.4% from 3.3% in April. Data for June should show headline disinflation driven by lower global energy prices, but with core pressures rising and labour income remaining solid, policymakers are likely to maintain a hawkish tone for now.
• The US Fed’s Goolsbee said he saw hopeful signs in the latest inflation report but warned that overall price pressures remain too high, while Williams said rates are well positioned to return inflation to the central bank’s 2% target. The CME FedWatch Tool is currently pricing the probability of a September hike at 47%.
• The heatwave searing much of Europe is officially the most severe ever recorded in the region, according to a study by World Weather Attribution. The current weather pattern - a blocked high-pressure system trapping hot air over Europe and drawing warm air up from the Sahara - is not unusual in summer and is unrelated to the El Niño event that has begun in the Pacific Ocean, the scientists said. Instead, the level of heat has been supercharged by global heating lifting demand for cooling while raising concerns about damage to crops across the region.

Key Points

• Equities: US was mixed, Europe hit records, while Asia’s chip rally reversed sharply as AI profit-taking returned.
• Volatility: S&P ended flat on Apple shock, defensive flow dominated Thursday, with options vol surface repricing heading into Friday's expiry
• Digital Assets: Crypto near multi-week lows on tech selloff spillover, IBIT protection demand outpacing exit flow
• Commodities: BCOM heads for sixth straight weekly loss as dollar strength, hawkish Fed and Strait reopening weigh
• Fixed Income: US yields drop at front end of yield curve as market slightly deflates FOMC hike expectation post-PCE inflation release.
• Currencies: USD consolidating as treasury yields ease back further post-PCE inflation release.