USD/CAD edges up on heightened geopolitical risks

USD/CAD trades a beat higher on Monday, rising into the 1.3620s, as the US Dollar (USD) strengthens in most pairs, on the back of safe-haven demand as markets are put on edge by reports the President of Iran, Ebrahim Raisi, died in a freak helicopter accident in Northern Iran over the weekend, according to Reuters. 

Additionally, Russia’s decision to open a second front in the Kharkiv region has intensified that hotspot. Russian President Putin’s visit to Beijing and the bonhomie expressed between himself and Chinese President Xi, highlights geopolitical divisions and the growing fault lines between the West and BRICS countries, with implications for world peace and free trade. 

Canadian Dollar (CAD) traders, meanwhile, await the release of critical Canadian Consumer Price Index (CPI) data for April, on Tuesday, which will inform Bank of Canada (BoC) future policy on interest rates, a key driver of FX. 

Markets expect the BoC to begin cutting its policy interest rate from the current 5.0% in June, with a 40% probability, according to FXStreet Editor Lallalit Srijandorn. Tuesday’s CPI release could change the probability. 

If CPI comes out higher than the 2.8% expected YoY, it will probably convince the BoC to delay, resulting in strength for the CAD since the maintenance of higher interest rates is positive for currencies, since it attracts greater foreign capital inflows. Such an outcome would be negative for USD/CAD which measures the buying power of one US Dollar in Canadian Dollars. If CPI comes out lower, the opposite effect is likely to be observed.

The probabilities of the Fed cutting interest rates in June, meanwhile, have fallen from over 50% at the start of the year to only 3.5% at the time of writing, according to the CME FedWatch tool which calculates the odds from interest-rate futures markets. The fall in probabilities was due to higher-than-expected inflation and growth in Q1. For a while markets even questioned whether the Fed would cut at all in 2024. This has been favorable for the USD and put a backwind behind USD/CAD for most of 2024. 

Data out last Wednesday, however, showed an unexpected cooling in US inflation and Retail Sales in April which led to a revival of bets that the Fed would start cutting interest rates. The probability of the fed funds rates being lower by September now stands at 65%. This had the effect of undermining the US Dollar last week, which weighed on USD/CAD. 

On Monday US Dollar traders await comments from several Fed officials which could impact expectations of the future path of interest rates. During the US session, Atlanta Fed President Raphael Bostic, Fed Vice Chair for Supervision Michael Barr, Fed Governor Christopher Waller and Fed Vice Chair Phillip Jefferson are all scheduled to deliver speeches, and their words will be analyzed for insights on Fed policy going forward.