The USD/CAD pair has extended its winning streak for the fourth consecutive session, driven by a shift in market sentiment from positivity to risk aversion. The catalyst behind this change is the heightened geopolitical situation, specifically the reported missile launch by the Islamic Revolutionary Guard Corps (IRGC) targeting espionage centers and gatherings of anti-Iranian terrorist groups in northern Iraq near the US Consulate in Erbil.
As a result of these developments, the USD/CAD pair is trading higher around 1.3480 during the early European hours on Tuesday. The reported attacks by the IRGC, coupled with concerns over Israel’s offensive in the Gaza Strip and an escalation in the Red Sea by Iran-backed Houthi rebels, have contributed to supporting crude oil prices. This support may have limited the losses of the Canadian Dollar (CAD) against the US Dollar (USD), with West Texas Intermediate (WTI) struggling to retrace recent losses and trading near $72.50 per barrel.
On the domestic front, the Bank of Canada’s (BoC) Business Outlook Survey Results on Monday indicated that softer demand and renewed competitive pressures are gradually exerting downward pressure on growth in output prices. While concerns about labor shortages are diminishing, businesses anticipate that wage growth will ease only gradually, leading to expectations of inflation persisting above the Bank of Canada’s 2.0% target for an extended period.
Looking ahead, Statistics Canada is scheduled to publish the Consumer Price Index (CPI) for December, with an anticipated annual increase of 3.4%, slightly higher than the 3.1% recorded in November. On a monthly basis, the index is expected to decline by 0.3%, following a 0.1% increase in the previous month. These figures will provide insights into the country’s inflationary trends and could impact market sentiments and the Bank of Canada’s policy considerations.
Meanwhile, the US Dollar Index (DXY) is experiencing upward support due to risk aversion, further reinforced by positive movements in US Treasury yields. Market participants will be closely monitoring the US NY Empire State Manufacturing Index for January and a speech by Federal Reserve official Christopher J. Waller scheduled for later on Tuesday.
