Canadian Dollar hits two-week highs as US Dollar retreats

The Canadian Dollar reached two-week highs on Thursday as the US Dollar retreated, following a decline in US Treasury yields. Concerns over debt-funded AI investments caused investors to move away from equities and into government bonds. Despite stronger-than-expected US economic data, the Greenback weakened as traders anticipated further Federal Reserve interest rate hikes.

The US Dollar traded around 1.4189, marking a low of 1.4169 in the previous two weeks. Data released on Thursday showed that the Producer Price Index (PPI) rose 1.3% month-over-month (MoM) and 6.3% year-over-year (YoY) in September, surpassing forecasts of 0.5% and 5.3%, respectively. Core PPI, excluding food and energy, increased 0.7% MoM and 5% YoY, also exceeding expectations.

Retail Sales climbed 0.8%, above the 0.3% forecast, following an upward revision of 1.3% in August. Weekly Initial Jobless Claims stood at 199K, slightly below the expected 200K and up from 198K the previous week. The data followed the release of the Consumer Price Index (CPI) report on Wednesday, revealing headline inflation accelerating to 3.7% (higher than the 3.6% forecast), while core inflation rose to 2.6% (above the 2.5% forecast).

The combination of resilient consumer spending and persistent inflation, partly driven by higher energy prices due to the Middle East conflict, strengthened expectations of another Fed rate hike before the end of the year. The CME FedWatch Tool indicated traders expecting a pause in October following September's 25-basis-point hike, with a 90% chance of another increase by December.

Canada's relatively low interest rates, compared to the United States, put the Loonie at a disadvantage. The Bank of Canada (BoC) maintained its policy rate at 2.25% so far this year, leaving little room for a rate increase as inflation's impact of elevated energy costs remains limited, with underlying inflation close to the BoC's 2% target.

Additionally, a weak labor market and uncertainty surrounding US trade policies kept policymakers cautious, although markets anticipated a rate hike by December.