The Canadian dollar is posting strong gains this week but is increasingly feeling the pressure as U.S. inflation dips. The USD/CAD is currently trading at 1.2840 after hitting a 4-week high. This comes after an excellent week in the market where the Canadian dollar rose by 270 points after shrugging off poor Canadian numbers but weathered the storm by piggybacking on crude oil.
The uncertainty in the U.S. economy is what is propelling concerns of impending deflation, having not posted a monthly gain on the key index since February with a flat CPI reading of 0.0%. The deflation of the American economy is the result of several factors such as weak retail sales reports as well as talk of a tighter oil market, despite record pumping levels in July by OPEC countries. The overproduction did little assure the International Energy Agency as they predict oil supplies will decrease in the third quarter.
Overall, the price of oil is expected to continue its rise, however, uncertainty in the oil market can be lifted if OPEC members are able to come to an agreement to curb prices when they meet in Algiers, Alg. In late September.
Price of oil and sluggish U.S. economic reports may lead to an interest rate hike by the Federal Reserve by the end of the year. However, the gains made by the commodity-linked Canadian dollar in lieu of its American cousin’s troubles is likely to be limited because the Bank of Canada is expected to hold rates where they are even if the Fed tightens U.S. monetary policy.