Higher Inflation and Geopolitical Tensions Weaken the Canadian Dollar

According to a Statistics Canada report released on Tuesday, the Canadian Consumer Price Index (CPI) increased to an annual rate of 3.4 percent in December, up from 3.1 percent in November. Higher-than-expected inflation has been a common theme worldwide in January. Recent comments from European Central Bank officials, indicating that they do not anticipate rate cuts until late 2024, if at all, combined with last week’s higher-than-expected U.S. inflation figures, have moderated global expectations for lower interest rates. This development has been a significant factor driving investors towards the safety of the U.S. dollar, leading to its broad strengthening so far in 2024. This trend is evident in both the U.S. dollar index and the USD/CAD pairing, which have reached new monthly highs (corresponding to CAD/USD lows).

In Canada, any hope that the Bank of Canada (BoC) might soon reduce rates has been significantly dampened. While the BoC is expected to maintain rates at its upcoming meeting next week, money markets have revised their expectations of a rate cut in March from a 50% to about a 33% likelihood, much to the dismay of Canadians nationwide.

Adding to the global atmosphere of unease and tension among investors are the ongoing U.S. military strikes against Houthi targets and the developing reports of two missing Navy SEALs off the coast of Somalia.

The Canadian dollar is currently trading at 1.3501 CAD against the US Dollar.

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