USD/CAD shifts auction profile above 1.3400 ahead of Canada Inflation

• USD/CAD has comfortably shifted its business above 1.3400 amid a recovery in the US Dollar Index.
• Caution is escalating despite overall optimism in the market ahead of US PPI data.
• The BoC will continue hiking interest rates despite softening of Canada’s inflation report.

The USD/CAD pair has shifted its auction profile above the round-level resistance of 1.3400 in the early Tokyo session. The Loonie asset has picked strength supported by the sheer recovery in the US Dollar Index (DXY). After a stellar recovery from a fresh seven-month low at 101.36, the USD Index is displaying signs of volatility contraction around 102.00.

S&P500 futures witnessed some sell-off on Monday after a four-day winning streak, however, the United States markets were closed on account of Martin Luther King Jr. Day. Growing caution for risk-perceived assets despite the fact that the Federal Reserve (Fed) is expected to slow down the pace of policy tightening may keep investors on the sidelines.

The USD Index is expected to dance to the tunes of the United States Producer Price Index (PPI) data, which will release on Wednesday. A change in the prices of goods and services at factory gates is going to provide more cues about inflation projections. The street sees a decline in headline factory gate prices of goods and services (Dec) to 6.8% from the former release of 7.4%. Also, the core PPI might trim to 5.9% from the former release of 6.2% in a similar period.

On the Loonie front, investors are awaiting the release of Canada’s inflation data, which is scheduled for Tuesday. According to the market estimates, the annual headline CPI will trim to 6.3% from the former release of 6.8%. However, the core inflation will escalate to 6.1% vs. the 5.8% released earlier. This might compel the Bank of Canada (BoC) to continue hiking interest rates as the road to 2% inflation seems far from over.

Meanwhile, the oil price has found an intermediate cushion of around $79.00 after a corrective move from above the crucial resistance of $80.00. The black gold is likely to resume its upside journey as bets for China’s economic recovery are soaring dramatically. It is worth noting that Canada is a leading exporter of oil to the United States and higher oil prices will support the Canadian Dollar.