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15/05/26
6
USD/CAD Rises on Stronger Dollar and Inflation Fears
The US dollar strengthened against the Canadian dollar in early European trade on Friday, with USD/CAD trading near 1.376. The pair is on track for its biggest weekly advance in more than two months, supported by firmer energy prices and the resulting increase in inflation expectations, which have reinforced the case for tighter US monetary policy later this year.
Market attention remains fixed on the second day of talks between US President Donald Trump and Chinese President Xi Jinping in Beijing. The discussions have centered on efforts to ease tensions in the Middle East and restore access to the Strait of Hormuz, a critical shipping route that has been disrupted since the conflict escalated in late February.
Trump said the visit produced substantial trade agreements and suggested that progress was made on a range of geopolitical issues. Xi was also described as having offered support for efforts to negotiate an end to the war with Iran and to keep maritime trade flowing through the region. Even so, risk sentiment remains fragile, which has helped sustain demand for the dollar as a defensive currency relative to the Canadian dollar.
Recent US inflation figures have added to that support. Data that came in hotter than expected have strengthened the view that US interest rates may need to remain elevated for longer. Futures markets now imply a higher chance of at least one more rate increase by the Federal Reserve at its December meeting, compared with expectations a week ago.
In Canada, the Bank of Canada’s latest meeting minutes indicated that policymakers believe they have room to remain patient. Officials decided to look through a temporary jump in headline inflation driven by global energy shocks. Governor Tiff Macklem has also signaled that any future policy moves are likely to be modest, although the direction of rates remains uncertain.
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