Canadian Dollar dips to fresh two-month lows amid higher US yields, Fed hiking bets

The Canadian Dollar (CAD) has reached fresh two-month lows against the US Dollar (USD) on Thursday, as soaring US Treasury yields and increased expectations of Federal Reserve (Fed) rate hikes have pushed the Greenback higher across the board. The USD/CAD pair has risen above 1.4100 for the first time in two months and is nearing late July highs near 1.4130.

Risk aversion is moderating markets on Thursday, as US Treasury yields surge to their highest levels in over 20 years, potentially increasing borrowing costs for mortgages, credit cards, and corporate loans, which could strain economic growth. This sentiment is counteracting the upside from a rebound in oil prices, Canada's principal import.

Brent Oil has recovered from Wednesday's lows and reached the $100 level, due to the failure of US and Iran representatives to reach an agreement at the United Nations (UN) General Assembly in New York, which has dampened hopes for an early reopening of the Strait of Hormuz. Societe Generale strategists point out that the 10-year Treasury yield has surpassed its 2023 peak (5.02%), initiating an upward trend.

While they acknowledge the move is somewhat excessive, they stress that there are no visible signs of a significant reversal. On Wednesday, the preliminary Manufacturing Purchasing Managers' Index (PMI) indicated a surge in 2s to 4.94% and 10s to 5.09%, fueled by the Federal Reserve (Fed) being ahead of expectations. This data is likely to trigger stop loss orders, which may have been exacerbated by a pre-auction concession.

US economic data released on Wednesday indicated robust business activity growth, with jobs and wages surging and input prices rising due to higher energy costs. This has fueled concerns about a potential overheating of the US economy, strengthening the argument for further Federal Reserve tightening in the coming months. Later on Thursday, Canada's Retail Sales data for July will be released, expected to show a 0.8% decline, reversing the 0.6% growth in June.

Meanwhile, in the US, investors will focus on the weekly Initial Jobless Claims figures to confirm the growing labor market tightening, as suggested by Wednesday's PMI report. Later, Philadelphia Fed President Anna Paulson and Cleveland Fed President Beth Hammack are set to provide additional insights into the banks' immediate policy plans.

The Retail Sales data, published monthly by Statistics Canada, measures the total value of goods sold by Canadian retailers based on a sample of different retail stores. Changes in Retail Sales, reflecting the rate of change in consumer spending, are closely monitored as an indicator of economic health. A high reading is typically seen as favorable for the Canadian Dollar (CAD), while a low reading is considered unfavorable.

The US Department of Labor releases Initial Jobless Claims data weekly, representing the number of individuals filing initial claims for state unemployment insurance. A higher-than-expected figure signals weakness in the US labor market, negatively affecting the US Dollar (USD) and vice versa. Every Thursday, the Department of Labor publishes the four-week average of Initial Jobless Claims, which is crucial for gauging the labor market's health.

Graduated in Communication Sciences at Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as a financial news editor and copywriter for various Forex-related firms, including FXStreet and Kantox.