The USD/CAD exchange rate is experiencing a significant setback following a notable deviation in the US Consumer Price Index (CPI) released in June. The year-on-year CPI stood at 3.0%, slightly lower than the anticipated 3.1% and significantly down from the previous 4.0%.
The core data was even more disappointing, falling short at 4.8% compared to the expected 5% and the previous 5.3%. Additionally, the monthly CPI figure came in at 0.2%, below the forecasted 0.3% and the prior 0.4%.
As a result, the USD/CAD pair has been testing the lower levels seen during the London and Asian sessions, hovering below the 1.32 mark. Market participants are currently evaluating their US Dollar forecasts, with the recent CPI release being a crucial factor in their assessment.
Short-Term Weakness for the US Dollar, But Long-Term Outlook Remains Intact
Analysts at Rabobank explain that the US Dollar tends to underperform when US interest rates are low and the global economic outlook is positive.
They note that China’s economic recovery has been disappointing, with soft demand for manufactured goods and domestic consumption pressures stemming from falling property prices and higher youth unemployment.
Furthermore, Germany’s exposure to China’s external sector, combined with its own manufacturing sector’s weak performance, suggests sluggish growth in the Eurozone.
Considering these factors, the analysts argue that the subdued growth prospects will likely keep risk appetite in check and support the safe-haven appeal of the US Dollar in the medium term.
Therefore, although a soft US CPI report is expected to weigh on the USD in the near term, the analysts do not anticipate it to mark the beginning of a sustained trend of USD selling.
Attention on the Bank of Canada
The upcoming catalyst for the USD/CAD pair will be the decision of the Bank of Canada (BoC). Speculations suggest that the central bank will raise interest rates by another 25 basis points to reach 5.00% in July. Any upward revisions in the July Monetary Policy Report (MPR) are likely to serve as the primary driver.
Analysts at TD Securities caution against blindly pursuing the strong Canadian Dollar story in the short term due to elevated positioning. However, they mention that a downward movement in USD/CAD will require the data to align with their unconventional view on US CPI and a BoC rate hike. If these conditions materialize, a test of recent lows ahead of 1.31 is expected in the near term.
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