The USD strengthened against the CAD on Tuesday as crude oil prices stabilised following the uncertainty around the Israel-Gaza conflict. Market sentiment was also improved after Federal Reserve (Fed) members highlighted flexibility in monetary policy.
West Texas Intermediate (WTI) price was around $71.00 per barrel. Crude oil prices have fluctuated on worries regarding the escalation of the Israel-Gaza war into a regional conflict. Lower crude oil prices tend to weaken the commodity-linked Loonie. Saudi Arabia cut the selling price (OSP) for February-loading Arab Light to Asia to the lowest level in 27 months which indicates lower fuel demand. This was also the result of competition from rival suppliers as Middle Eastern and African countries increased production in December. This has weighed on crude oil prices for the second consecutive day and supported the USD/CAD currency pair.
The releases of Canadian International Merchandise Trade Balance and Building Permits on Tuesday were crucial in providing further insights into how well the Canadian economy has fared. The consensus indicated a fall in the Canadian International Merchandise Trade Balance from $3.2 billion to $2 billion for November, but the actual figure showed a further drop to $1.57 billion which points towards a change in the imports and exports of Canadian goods. November’s Building Permits were also expected to fall from 3% to -1.7%, but the actual number was much lower down to -3.9%, which shows a significant slowdown in construction activities. Data relating to construction are closely watched as it reflects trends in the real estate and housing sectors and tend to influence the CAD.
Federal Reserve rhetoric
Atlanta Fed President Raphael W. Bostic and US Fed Governor Michelle W. Bowman have demonstrated a more cautious approach which has affected the greenback and market sentiment. In particular, Bostic said that he expects two quarter-point cuts by the end of 2024. Bowman has recognised that the current policy is sufficiently restrictive, but the possibility of a rate cut if inflation drops closer to the 2% target has added to the dovish sentiment.
US CPI on Thursday
The US jobs market remains resilient as shown in the better-than-expected US monthly jobs report on Friday. This will allow the Federal Reserve (Fed) to keep rates higher for longer. Recent hawkish remarks by various Fed officials have also diminished investor expectations for a more aggressive policy easing in 2024 and supported higher US Treasury bond yields. A report by the New York Fed on Monday showed that US consumers expectations of inflation in the short term fell to the lowest level in nearly three years in December, indicating a potential change in the Fed’s policy stance. This may limit any gains for the USD/CAD pair.
On Thursday, investors will closely watch the release of the latest US consumer inflation figures. The US CPI report could offer fresh clues about the Fed’s rate-cut path this year, which will affect the USD and determine the potential direction for USD/CAD pair.