Canadian Dollar holds near lows as high US yields buoy the Greenback

The US Dollar (USD) is practically flat against the Canadian Dollar (CAD) on Wednesday, hovering at a short distance from the four-week high, at 1.3724. The strong US consumer inflation figures released on Tuesday, and the rally on US Treasury yields are supporting the US Dollar, while the high Oil prices keep the Loonie from falling further.

US Consumer Prices Index (CPI) data from April confirmed the inflationary impact of the Middle East conflict as the yearly rate accelerated to its highest level in nearly three years, at  3.8%, beating expectations of a 3.7% reading, and well above the 3.3% reading seen in March. The core CPI also beat expectations, with a 2.8% growth in the last 12 months from 2.6% in March.

Fed easing expectations fall

These figures prompted investors to abandon any hope of further Federal Reserve (Fed) monetary easing in the foreseeable future, while expectations for a rate hike grow. The CME Group’s Fed Watch Tool reflects a 30% chance of a quarter-point monetary tightening before December this year, up from 15% one week ago. This is fuelling the rally in US Treasury yields, which are right below 2026 highs, and buoying the Greenback.

The Canadian Dollar, on the other hand, is drawing support from the high Oil prices amid the stalemate in the US-Iran peace process. Oil is Canada’s main export, and the WTI Oil barrel remains $97.00, boosting Canada’s trade revenues and underpinning the Loonie.

In the calendar on Wednesday, the main event will be the US Producer Price Index (PPI) for April, which is also expected to show a significant acceleration. The focus, however, will remain on US President Donald Trump's visit to China, where he is expected to discuss Iran’s conflict, Taiwan’s status, and rare earths trade, among other topics, with his Chinese counterpart, Xi Jinping.

(This story was corrected on May 13 at 07:13 GMT to say that Fed rate hike expectations for December were at 15% one week ago, and not at 21% as previously stated.)