USD/CAD under pressure as Canada PMI improves, US data disappoints

• The Canadian Dollar rises for a third straight session, supported by higher oil prices and a weaker US Dollar.
• Canada's manufacturing PMI improves slightly to 46.1 in May, while US factory activity shows deeper contraction.
• Investors price in a 75% chance that the Bank of Canada will hold rates at 2.75% on Wednesday, with market focus shifting to inflation risks.

The Canadian Dollar (CAD) extends its winning streak against the US Dollar (USD) for a third consecutive day on Monday, supported by rising oil prices and sustained weakness in the Greenback.

The latest PMI figures offered additional support to the Loonie, with Canada's factory activity showing a slight improvement, though it remained in contraction. On the other side, mixed US manufacturing data weighed on the US Dollar, keeping the USD/CAD pair on the defensive below the 1.3700 mark. At the time of writing, the pair is trading near 1.3698 during the North American session.

The S&P Global Canada Manufacturing PMI rose to 46.1 in May from 45.3 in April, indicating the sector remains in contraction for a fourth consecutive month. Output and new orders continued to fall sharply. Meanwhile, the US ISM Manufacturing PMI dropped to 48.5 in May from 48.7, falling short of market expectations and marking the sharpest contraction since November 2024. The data highlighted persistent economic uncertainty and sustained cost pressures, partly driven by the US President Donald Trump administration's volatile trade policies.

Looking ahead, the Bank of Canada (BoC) is set to announce its interest rate decision on Wednesday. While markets previously leaned toward a rate cut, stronger-than-expected Q1 GDP growth of 2.2% has shifted the consensus toward holding the current 2.75% policy rate. According to Reuters, investors now see around a 75% chance that the BoC will leave rates unchanged.

Scotiabank's Derek Holt has pushed back firmly against easing in a post titled "No way the BoC should be cutting any time soon, if at all." He pointed to persistently elevated core inflation, even before the full effects of tariff-related supply shocks take hold. "Despite modest slack, other forces are keeping core inflation at sticky, elevated levels," he noted.