Canadian Dollar gains ground as oil prices rise

USD/CAD loses ground for the second consecutive day, trading around 1.4200 during the Asian hours on Friday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) receives support from higher oil prices. It’s worth noting that Canada is a major net exporter of crude oil, and petroleum is the country's single largest source of foreign exchange income.

Crude oil prices rise following a suspected projectile attack on a cargo vessel near Oman, which abruptly halted United Nations (UN) evacuation efforts in the vital Strait of Hormuz and renewed anxieties over 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 stark warning, stating that the security of any vessels traveling outside designated Hormuz shipping routes is no longer guaranteed.

The downside for the USD/CAD pair remains limited as the US Dollar (USD) finds support from growing expectations of a Federal Reserve (Fed) rate hike. According to the CME FedWatch tool, markets have priced in a 63.4% probability that the Fed will raise interest rates during its September 15–16 meeting.

This hawkish sentiment is fueled by accelerating inflation data, with the headline Personal Consumption Expenditures (PCE) Price Index climbing to 4.1% year-over-year in May, up from 3.3% in April. This surge, the first time the headline figure has breached 4.0% in three years, is largely attributed to rising energy prices stemming from the Middle East conflict, keeping the prospect of further rate increases this year firmly on the table.

Furthermore, the Fed’s preferred inflation gauge, the core PCE index, rose to 3.4% year-over-year from the previous 3.3%. This represents the highest annual core reading since October 2023, signaling persistent inflationary pressure that continues to bolster the US Dollar.