USD/CAD is experiencing depreciation as the commodity-linked Canadian Dollar finds support from the upward movement in oil prices. Oil prices increased following an attack on a vessel near Oman, which interrupted UN evacuations in the Strait of Hormuz, reigniting concerns over energy supply. The US Dollar may find support as increasing expectations of a Fed rate hike enhance investor demand for the currency. USD/CAD experiences a decline for the second straight day, hovering near 1.4200 during the Asian trading session on Friday. The pair depreciates as the commodity-linked Canadian Dollar gains support from elevated oil prices.
Canada stands out as a significant net exporter of crude oil, with petroleum representing the country’s foremost source of foreign exchange income. Crude oil prices have increased in response to a suspected projectile attack on a cargo vessel near Oman. This incident has led to the sudden suspension of United Nations evacuation efforts in the crucial Strait of Hormuz, heightening concerns regarding the global energy supply. The geopolitical friction intensified after Thursday’s market close when two US officials reported that Iranian forces had fired on the cargo ship as it attempted to navigate the strait.
In response, Iranian authorities issued a clear warning, indicating that the security of any vessels operating outside the designated Hormuz shipping routes is no longer assured. The downside for the USD/CAD pair remains limited as the US Dollar finds support from growing expectations of a Federal Reserve rate hike. According to the CME FedWatch tool, markets have assigned a 63.4% probability to the Fed raising interest rates during its meeting on September 15–16. This hawkish sentiment is driven by rising inflation data, as the headline Personal Consumption Expenditures Price Index increased to 4.1% year-over-year in May, up from 3.3% in April.
This surge, marking the first instance the headline figure has exceeded 4.0% in three years, is primarily linked to escalating energy prices due to the Middle East conflict, thereby maintaining the possibility of additional rate hikes this year firmly in consideration. Furthermore, the Fed’s preferred inflation gauge, the core PCE index, increased to 3.4% year-over-year from the prior 3.3%. This indicates the most elevated annual core reading since October 2023, highlighting ongoing inflationary pressures that continue to support the strength of the US Dollar.