USD/CAD Market Update

Current Level: Low-1.38s (24hr range 1.3799 to 1.3822)

USD/CAD is grinding sideways in the low-1.38s as markets digest a fresh round of US-Iran military activity overnight against a broader backdrop of stronger US yields and a hawkish shift in Fed communications. Equity risk appetite remains firm, with the S&P 500 and Nasdaq pushing to new records, while the Canadian dollar continues to trade off relative rates rather than headline flow.

Market Overview:

Risk tone is constructive despite the overnight escalation. The US military struck targets in southern Iran and engaged two Islamic Revolutionary Guard Corps vessels described as attempting to lay mines, with Tehran vowing retaliation. Brent crude rallied roughly 2% to around $98 per barrel on the news. Equities have shrugged off the geopolitical noise, with the Semiconductor Index up another 3% on continued strength in memory names. The US dollar is broadly stable against the G10, with DXY sitting just below the 100-101 pivot. CIBC characterises the price action as the market treating headlines as volatility around an eventual deal rather than a breakdown in talks.

Iran-Hormuz: Markets Lean Toward Eventual Deal:

Negotiations remain in flux. Over the long weekend, the White House signalled a Strait of Hormuz reopening pact was close to finalisation, then walked the timeline back on Sunday before describing talks as "proceeding nicely" on Monday. Iran has publicly contradicted the optimistic framing, and the two sides remain far apart on the core questions of Strait management and nuclear material handling. Oil's measured response, with Brent up roughly 2% rather than spiking, suggests the market still expects a negotiated outcome. Risk to the dollar is asymmetric here: a credible deal would likely unwind some of the recent USD bid, but persistent stalemate keeps the safe-haven and energy-cost channels working in the dollar's favour.

Fed Watch:

Governor Waller's May 22 speech is reshaping the front end. Waller called for removing the easing bias from the policy statement, arguing it is no longer appropriate to characterise a cut as more likely than a hike given inflation running above target and a labour market that is not slowing sharply. He stopped short of advocating active tightening, framing his preferred path as a hold. CME FedWatch now prices the December 17 meeting at roughly 78% hold, 15% cut, and 5% hike, a clear shift from the cut-leaning skew that prevailed through April. June 17 remains a near-certain hold, with only 6% odds of a hike priced. US two-year yields have risen, and US-Canada two-year spreads have widened to roughly 120 basis points, the widest since July 2025, providing the relative-rate support behind the dollar's recent firmness.

Canadian Data/Outlook:

The Canadian dollar remains range-bound ahead of Friday's first-quarter GDP report, which is expected to show growth at a 1.5% annualised pace following a 0.6% contraction in Q4 2025. An advance April monthly estimate will be released alongside the print and will be watched for second-quarter handoff signals. Markets place near-zero odds on a Bank of Canada move at the June 10 meeting, with overnight index swaps pricing roughly 34 basis points of tightening by year-end, down from close to 80 in mid-March. CIBC strategists view current USD/CAD levels as attractive to sell, maintaining a 1.3400 year-end target. The view rests on Canadian growth showing tentative signs of recovery and on US yield support eventually fading once the inflation impulse rolls over.

Technical Picture:

Resistance: 1.3820 (200-day moving average, intraday ceiling), then 1.3869 (May 22 high zone)
Support: 1.3728 (recent base), then 1.3643 (mid-May floor)
Outlook: The 200-day moving average has held as resistance for three consecutive sessions. A clean break and close above 1.3825 would open 1.3869 and force a reassessment of the range; failure here keeps the pair vulnerable to a retracement back toward 1.3728 if Friday's Canadian GDP surprises higher or US yields roll over.

Week Ahead:

Thursday's Core PCE print is the week's central event for USD direction. A consensus 0.3% m/m would lift the year-over-year rate toward 3.3%, validating the dollar bid and the Waller framing. A soft surprise would partially unwind the post-Waller rates repricing. Friday's Canadian GDP carries the CAD tail risk: an upside surprise toward 2.0% annualised would reopen a constructive CAD narrative.

Other Notes:

• S&P 500 and Nasdaq printed fresh record highs overnight, led by semiconductors.
• Gold trading heavy, failing to bid alongside risk despite the Iran headlines.
• EUR/USD capped below 1.1650; year-end ECB tightening expectations have fallen to roughly 55 basis points from 85 in late April.
• GBP/USD holding above 1.34, with sterling stable but lacking momentum after softer UK data.