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Canadian Dollar Set for Gains as US Dollar Loses Ground

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The Canadian dollar touched a three-month high (USD/CAD low) on Thursday after lower-than-expected CPI inflation numbers were reported in the US on Wednesday. However, the Canadian dollar’s momentum quickly dissipated. This appears to be more a case of broad US Dollar weakness rather than Canadian dollar strength, as the broader USD index has lost 1.6% to date in June. The weakening US dollar is a result of increased expectations that the FED will begin its rate-cutting cycle in September, with the market pricing in approximately a 90 percent chance that the FED will cut rates in September (up from about 70% on Wednesday). This view was further reinforced by Chicago FED President Austan Goolsbee, whose dovish comments on Thursday indicated that, in his opinion, the US economy is on track to reach 2% inflation. These are some of the first signals from policymakers that a rate cut is coming.

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Canadian Dollar Gains as FED Gets Closer to Rate Cut

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Another quiet day in a generally quiet week for the Canadian dollar. The overall market direction has been incremental gains for the Canadian dollar versus the US dollar, mostly based on the perception that the Federal Reserve is inching ever closer to a rate cut in September, with markets currently betting that there is a 70% chance of this happening by then. This has helped alleviate some market concerns about the BoC getting too far ahead of the FED with respect to interest rate differentials.

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