USD/CAD Market Update

Current Level: Mid-1.38s (24hr range 1.3826 to 1.3870)

The April PCE release this morning delivered a mixed picture that left the dollar on the back foot at the margin. Core PCE m/m printed at 0.2%, undershooting the 0.3% consensus, while the year-over-year reading held at 3.3%, the highest level since 2023. Headline PCE accelerated to 3.8% year-over-year, the biggest two-month acceleration since 2021. Personal income was flat against a 0.4% forecast, and the savings rate fell to its lowest level since 2022. Alongside the inflation data, the second estimate of Q1 GDP was revised down to a 1.6% annualised pace from the 2.0% prior estimate, with personal consumption and investment contributions both adjusted lower.

Market Overview:

Risk tone is fragile. Equity futures are pointing to a modest open lower as traders weigh the inflation print alongside renewed US-Iran tensions. The US dollar is mixed against the G10 basket, with the higher-beta currencies including CAD and AUD underperforming on the geopolitical headlines while the front-end dollar bid eases on the soft core PCE m/m. Front-end Treasury yields slipped on the print, and US two-year yields gave back a portion of the post-Waller move higher. Bonds elsewhere are higher in yield with no major moves to report.

Stagflation Signal Hardens:

The PCE and GDP combination released this morning is a meaningful shift in the US macro picture. Core PCE running at 3.3% year-over-year, headline at 3.8%, and personal income stagnating in nominal terms all point toward an inflation impulse that is not rolling over while household momentum softens underneath. The Q1 GDP revision to 1.6% from 2.0% sharpens that view. A number of Fed officials, including Lisa Cook, Philip Jefferson, and Neel Kashkari, have expressed unease about inflation risks over the past two sessions, suggesting that incoming chair Kevin Warsh will struggle to align the rate-setting committee on near-term cuts. The soft core m/m gives the doves a partial off-ramp, but the y/y trajectory and the energy-driven headline pressure leave the Fed in a difficult spot.

US-Iran: Hormuz Tail Risk Returns:

The Mideast peace-driven relief rally that lifted risk assets earlier this week has begun to unwind. US Central Command confirmed strikes on the port city of Bandar Abbas overnight, the second US military action against Iran in three days, conducted in self-defence after intercepting attack drones in the Strait of Hormuz region. Tehran has accused Washington of breaching the ceasefire. WTI rallied 3.6% overnight to $97.64. The Strait of Hormuz, through which roughly a fifth of global oil supply passes, remains effectively closed. For USD/CAD specifically, the energy-cost channel is a modest dollar tailwind here, but a confirmed de-escalation would reverse the move quickly and weigh on the safe-haven bid.

Canadian Data/Outlook:

Tomorrow's March monthly GDP release is the next catalyst, with consensus at 0.1% m/m against a 0.2% prior. The Canadian dollar continues to trade off relative front-end rates rather than the commodity channel. Markets place near-zero odds on a Bank of Canada move at the June 10 meeting. The US-Canada two-year government bond yield spread has narrowed marginally on the soft Core PCE m/m but remains wide enough to keep relative-rate support behind the dollar. CIBC strategists continue to view current USD/CAD levels as attractive to sell, maintaining a 1.3400 year-end target on the view that Canadian growth is showing tentative signs of recovery and that US yield support will eventually fade as the inflation impulse rolls over. RBC carries a 1 to 3 month target of 1.3500, consistent with the same broad direction.

Fed Watch:

CME FedWatch continues to price the December 17 meeting at roughly 78% hold, 15% cut, and 5% hike, broadly unchanged after this morning's print. The soft core m/m has trimmed the post-Waller hawkish bias slightly at the very front end but has not been sufficient to reopen the cut path materially. The June 17 meeting remains a near-certain hold. The market is signalling that sustained soft m/m prints over a period of months would be needed to build a credible case for an eventual return to an easing trajectory.

Technical Picture:

Resistance: 1.3869 (next key level, RBC), then 1.3932 (strong congestive resistance)
Support: 1.3799 (initial), then 1.3728 (recent base), then 1.3709 (trendline, close below needed to neutralise upside risk), then 1.3568 (key trendline to reassert broader downtrend)
Outlook: RBC characterises the near-term backdrop as a corrective rally that remains intact while the pair holds above 1.3799. Today's pullback to 1.3827 is consistent with that framing rather than a break of yesterday's 200-day moving average breakout. A daily close above 1.3932 would prompt a reassessment of the broader bearish trend. A close below 1.3709 would neutralise the upside risk.

Week Ahead:

Tomorrow's Canadian GDP print is the immediate CAD-specific catalyst. A consensus 0.1% m/m or softer keeps the relative-rate story in the dollar's favour and the pair grinding the recent range. A beat would force a reassessment of the BoC trajectory and challenge the breakout. Next Friday's joint Canada-US employment reports are the broader anchor for the week after.

Other Notes:

• S&P 500 and Nasdaq opening lower after the historic semiconductor melt-up paused.
• Front-end Treasury yields slipping on the soft core PCE m/m print.
• Durable goods orders rose 7.9% in April, but ex-transportation up only 1.1%, with the headline boosted by Boeing aircraft orders.
• Canada secured its first long-term LNG supply agreement with Germany's SEFE, with the Ksi Lisims West Coast project to supply one million tonnes annually over 20 years.