Canadian Dollar advances due to softer US Dollar, higher oil prices

USD/CAD extends its losses for the third consecutive day, trading around 1.3870 during the Asian hours on Monday. The pair depreciates as the US Dollar (USD) declines amid weaker-than-expected US economic data and shifting central bank expectations.

US Census Bureau reported on Friday that Retail Sales fell by 0.6% month-over-month in July, following a 0.2% rise in June, coming in below the market consensus of 0.1% growth. On an annual basis, Retail Sales rose 5.0% in July compared to 6.8% in the previous month.

Traders have reduced their bets on Federal Reserve rate hikes following a slew of softer US data, including CPI, PPI, and Retail Sales. Markets are now pricing in a 33.1% chance of a rate hike next month, down from 44% last week according to the CME FedWatch tool.

The USD/CAD pair faces challenges as the commodity-linked Canadian Dollar (CAD) receives support from higher oil prices. West Texas Intermediate (WTI) oil price continues to gain for the second consecutive day, trading around $81.80 per barrel at the time of writing. Crude oil prices advance as elevated tensions in the Middle East kept markets wary of further supply disruptions. Over the weekend, Israel launched fresh strikes on Lebanon that killed 11 people, including a senior Hezbollah commander.

Oil market braces for deeper supply shortfall as Gulf outages mount

Commerzbank warns that the disruption to output in the Gulf is materially tightening the global balance, with its analysts estimating that “due to significant production losses in the Gulf region, total supply is expected to fall by 4.3 million barrels per day, meaning the oil market will be significantly undersupplied this year.” Citing the latest projections from the IEA, the bank notes that “the supply deficit in the third quarter stands at 1.8 million barrels per day. This is 1 million barrels per day more than previously expected,” underscoring how quickly the perceived shortfall has widened.

Meanwhile, US President Donald Trump is preparing new economic sanctions aimed at forcing Iran to surrender, as pressure mounts on his administration to bring the military campaign to an end. The situation remains fragile as the interim ceasefire agreement between the US and Iran is set to formally expire later in the day, while negotiations to resolve the conflict and reopen the Strait of Hormuz remain deadlocked.