The Canadian Dollar (CAD) surged to an eight-month high against the US Dollar (USD) on Thursday, sending the USD/CAD currency pair plummeting to levels not seen since October of last year. The latest catalyst driving this upswing was the release of softer-than-expected US Producer Price Index (PPI) inflation data for May. 

The weaker print dented the Greenback, reinforcing growing Federal Reserve (Fed) rate cut expectations and providing the Loonie with ample momentum. This article from Fimatron explains the topic thoroughly, offering expert guidance throughout.

CAD Strengthens as US Inflation Disappoints

The headline US PPI rose just 0.2% month-over-month, compared to expectations of a 0.3% increase, signaling a more moderate rise in producer-level inflation. The core PPI, which strips out food and energy, also fell short of expectations. 

This underwhelming inflation data further supported dovish Fed expectations, especially with markets already leaning toward policy easing following a run of disinflationary signals.

As a direct result, US Treasury yields dipped, while Fed funds futures soared. According to the CME FedWatch Tool, market participants are now pricing in an almost 80% probability of at least a 25 basis-point rate cut in September. 

This rate repricing sent the US Dollar Index (DXY) lower, placing downward pressure on USD-paired currencies, particularly the USD/CAD.

USD/CAD Falls to 1.3600 as Loonie Leverages Greenback Weakness

The USD/CAD pair dropped through key technical support levels, landing near the 1.3600 region, a significant psychological barrier and the lowest level since October. The pair has been descending along a well-defined bearish channel since February, when it peaked around 1.4800, its highest level in over two decades. 

Since then, the CAD has methodically recouped its losses, helped by both external factors like US macroeconomic weakness and internal stability in Canadian monetary policy.

The sharp drop in USD/CAD on Thursday amounted to a 0.5% gain for the Loonie, underlining how reactive the FX markets remain to shifts in the Fed policy outlook. With interest rate expectations now tilting toward loosening, the Greenback is facing sustained selling pressure across the board.

Canadian Economic Data Sparse Ahead of June CPI

While external drivers, namely US inflation and Fed commentary, are currently guiding price action, the Canadian economic calendar remains relatively empty until late June. The next major domestic dataset is the Consumer Price Index (CPI) for May, due on June 24. Until then, traders will have to navigate broader macroeconomic crosscurrents.

The Bank of Canada (BoC) recently broke a streak of seven consecutive rate cuts, holding its overnight rate steady at 2.75%. Though the pause was seen as an acknowledgment of economic resilience, policymakers expressed caution about underlying inflation pressures and wage growth. 

However, with inflation slowly moderating and real GDP growth softening, there is a genuine question about whether the BoC will resume cutting rates at its next meeting on July 30.

CAD Outlook: Bullish Momentum Sustains While Greenback Struggles

Technically, the USD/CAD pair is firmly entrenched in a bearish trend, having broken below the 200-day moving average and continued to post lower highs and lower lows. The 1.3600 region now acts as a short-term support, with any break lower opening the path toward 1.3500, a level last tested in September 2023.

Momentum indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) continue to suggest that downside momentum is intact. For bullish CAD traders, maintaining positions above 1.3600 could be an opportunity to ride the wave further as long as risk sentiment and rate expectations remain favorable.

For now, the CAD’s strength is driven more by external weakness in the USD than by a surge in domestic fundamentals. Nevertheless, with the BoC maintaining a wait-and-see stance and the Fed drifting toward dovishness, the fundamental divergence between the two central banks continues to underscore the CAD’s upside potential.

Conclusion: Loonie Leads While the Dollar Dithers

The Canadian Dollar’s recent performance underscores how tightly FX markets are tethered to interest rate differentials and inflation trends. With the Greenback under pressure from disappointing inflation data and increased bets on Fed rate cuts, the Loonie has capitalized, pushing USD/CAD to multi-month lows. 

As the BoC takes a breather from its rate-cutting cycle and US data keeps surprising to the downside, traders can expect continued CAD strength, at least in the near term.