USD/CAD Bounces Amid Rising Oil Prices and Geopolitical Tensions
The USD/CAD pair has rebounded slightly from its lowest level since June 10 at 1.3914 to around 1.3930, finding temporary respite after three consecutive days of declines.
Oil prices have risen to a one-and-a-half-week high due to escalating geopolitical tensions in the Middle East, particularly in the Red Sea and Bab el-Mandeb Strait, where Iran-backed Houthi militants have intensified attacks targeting vessels linked to Saudi Arabia.
This surge in oil prices is providing support to the Canadian dollar, which exhibits a strong positive correlation with crude oil prices. Rising oil prices directly improve Canada's terms of trade and expectations for energy export revenues, capping upside potential for USD/CAD.
The near-term direction of USD/CAD will be determined by tonight's U.S. CPI data, followed by Thursday's Producer Price Index (PPI). If the CPI comes in hot, particularly if core inflation exceeds expectations, it would further reinforce expectations of rate hikes and push up U.S. Treasury yields, potentially exerting downward pressure on the Canadian dollar.