The Canadian Dollar (CAD) fell on Tuesday after inflation data revealed increases in both Canada and the US. This caused the USD/CAD pair to rise past the 1.3700 mark. The inflation spike in June raised worries that central banks might delay rate cuts. The Canadian Dollar slipped by 0.4% compared to the US Dollar. Investors seeking safety turned to the US Dollar, leading to a drop in the CAD. Canada’s annual CPI inflation went up to 2.7% from 2.5%, and core inflation rose to 1.9% from 1.7%. Similarly, US CPI inflation for June increased to 2.7% from 2.4%, affecting expectations for rate cuts in September.

Canadian Dollar Outlook

The Canadian Dollar may face further declines as it struggles against the US Dollar. The USD/CAD pair could push higher soon, even though it is currently below the 200-day and 50-day EMAs, due to potential shifts in market momentum. Key factors influencing the CAD include the Bank of Canada’s interest rates, oil prices, economic conditions, inflation, and trade balance. These elements, along with the state of the US economy, significantly impact the CAD’s value. Rising inflation and changing strategies from central banks suggest a negative outlook for the Canadian Dollar in the short term. Following recent inflation surprises, we see a potential shift in central bank policies. The market had expected a smooth path toward rate cuts, but new data brings uncertainty. Traders in derivatives should prepare for a period where the US dollar is likely to strengthen. It’s important to note that Canada’s annual inflation accelerated to 2.9% in June, while the US CPI increased to 3.1%. Both exceeded expectations and challenge the narrative of decreasing inflation. These numbers are critical to the models used by central bankers and make a September rate cut by the US Federal Reserve much less likely.

Market Strategy and Analysis

We believe this signals a widening policy gap between the US and Canada, benefiting the greenback. The Bank of Canada, under Governor Macklem, may pause its easing strategy, while Fed officials like Powell indicate that rates will remain high for longer. This difference is a key factor driving a higher USD/CAD exchange rate. As a result, we are considering buying call options on the USD/CAD pair, aiming for a rise above the 1.3800 level last seen in April. This approach allows us to take advantage of potential gains with limited risk. Given the increase in market uncertainty, options with defined risks are particularly appealing right now. We are also keeping an eye on West Texas Intermediate crude oil, which has been softening around $80 per barrel. Historically, a strong US dollar combined with steady or falling oil prices tends to put pressure on the commodity-linked loonie, possibly accelerating the upward momentum of the pair. For those exposed to a strengthening Canadian dollar, we recommend hedging. Buying put options on the Canadian dollar or selling CAD futures can safeguard your portfolio against the bearish trend we anticipate. This defensive strategy is vital in response to the changing economic landscape. Create your live VT Markets account and start trading now.

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