Market Analysis Summary - August 2026
Key Takeaways
- Canada's July CPI rose to 3.0% YoY, impacting USD/CAD, while the Bank of Canada remains cautious.
- Australia's employment fell, raising unemployment to 4.5%, but core inflation pressures keep the RBA's rates at 4.35%.
- FOMC minutes showed hawkish sentiments, but markets are pricing in a 60%-70% chance of rate cuts in September.
- Major currencies rallied against the U.S. dollar, with NZD/USD and AUD/USD leading gains.
Canada Inflation & Bank of Canada Policy
Statistics Canada reported a July CPI increase to 3.0% YoY, surpassing expectations due to rising gasoline and travel costs. This led to a temporary strengthening of the Canadian dollar, pushing USD/CAD down by approximately 0.2% to 1.3850. Despite this, the Bank of Canada (BoC) is cautious, balancing inflationary pressures against risks to growth, such as reduced household consumption and high debt servicing costs. Money markets are now pricing in a longer hold on interest rates, with rate cuts expected to be delayed as the BoC seeks confirmation of sustained disinflation.
Australian Labor Market & RBA Dilemma
Australia's labor data revealed a surprising drop in employment by 15,800 jobs in July, raising the unemployment rate to 4.5%. This decline was primarily due to a loss of part-time jobs, leading to a 0.6% decrease in total hours worked. Initially, this put downward pressure on the Australian dollar, but it later rebounded as the currency rallied against the U.S. dollar. The Reserve Bank of Australia (RBA) faces a challenge in managing a cooling labor market while core inflation remains elevated at around 3.6%, keeping the RBA's interest rates at 4.35%.
FOMC Minutes & Rate Expectations
The July FOMC meeting minutes indicated a hawkish stance among Federal Reserve officials, with some advocating for an immediate rate hike. However, the market reacted with a modest sell-off of the U.S. dollar, focusing instead on recent economic data showing cooling inflation and job losses. The CME FedWatch tool indicated a significant increase in the probability of a 350–375 bps target rate for the September meeting, climbing to 60%-70% by late August.
Major Currency Dynamics
During the week of August 17-21, major currencies experienced a rally against the U.S. dollar, particularly on August 19, when a broader sell-off of the dollar occurred. The New Zealand Dollar (NZD/USD) led the gains with a 1.57% increase, followed by the Australian Dollar (AUD/USD) at 1.33%. Other currencies, including the Euro (EUR/USD) and the Canadian Dollar (CAD/USD), also saw significant gains, reflecting a shift in market sentiment.
Conclusion
The week highlighted diverging monetary policy dynamics and shifting market expectations across major central banks. While Canada's inflation uptick provided short-term support for the CAD, Australia's cooling labor market contrasted with persistent inflation, keeping the RBA cautious. Meanwhile, the market largely overlooked hawkish FOMC minutes, focusing instead on softer economic indicators that drove gains across major currency pairs against the U.S. dollar.