USD/CAD Market Update

Current Level: Low-1.38s (24hr range 1.3770 to 1.3830)

The headline event this morning is a sharp downside surprise in Canadian first-quarter GDP, which contracted at -0.1% annualised against expectations near +1.5%. Coming after the prior quarter's contraction, the print places the Canadian economy in a technical recession. The reaction in USD/CAD has been muted, with the pair holding in the low-1.38s and below the 1.3900 level that has capped the range. The pair has given back this week's break above its 200-day moving average and is trading modestly lower on the day.

Market Overview:

Risk appetite is slightly positive into the end of the week. Equity markets are higher, with the S&P 500 on track for its ninth consecutive weekly advance. The US dollar is mixed against the G10 basket with no large moves to report. Energy prices are lower, with WTI easing toward 87 dollars per barrel as traders weigh the prospect of a US-Iran agreement this weekend. Global bond yields are marginally lower. The Canadian dollar is trading primarily off the relative front-end rate story rather than the commodity channel, which explains the limited reaction to both the weak growth data and softer oil.

Canadian GDP Contracts:

First-quarter GDP contracted at -0.1% annualised, a severe miss against the roughly +1.5% consensus and a meaningful disappointment relative to any reasonable forecast. CIBC notes the weakness was broad, driven by a fifth straight decline in business investment, a drag from net trade, and a sustained pull from the housing market. The print reinforces the view that Canadian growth stays soft in the near term. The one partial offset is the revision-prone monthly flash estimate for April, which RBC notes came in firm at 0.4% month over month, though the underlying surprise there was on the demand side, with final domestic demand softer than anticipated. Both banks read the data as consistent with a Bank of Canada that stays on hold, an outcome markets had largely priced heading into the release, which is why the currency reaction was contained.

US-Iran Ceasefire Optimism Returns:

Reports point to a tentative US-Iran arrangement that would extend the ceasefire by 60 days and reopen the Strait of Hormuz, while both sides commit to further talks on more complex issues including Iran's nuclear program. The deal remains pending approval from both the US administration and the Iranian government. For the US to agree, Iran would need to turn over its highly enriched uranium and remove mines currently placed within the Strait. Nothing has been formally confirmed, and the path here has repeatedly stalled close to resolution. WTI has eased toward 87 dollars per barrel on the optimism. The price action remains two-way: a confirmed agreement would unwind a portion of the geopolitical risk premium in oil and the safe-haven dollar bid, while any setback would reverse the move quickly.

Canadian Data/Outlook:

Markets place near-zero odds on a Bank of Canada move at the June 10 meeting, and this morning's weak growth data does not change that base case given softer inflation and a weak jobs report earlier this month already pointed to a hold. RBC forecasts the BoC overnight rate steady at 2.25% through the fourth quarter. With both the BoC and the Fed expected to hold, the US-Canada front-end rate spread stays wide, which acts as a floor under USD/CAD and explains the limited downside reaction to the GDP miss. On the directional view, CIBC strategists are reiterating a call to sell US dollars, looking for a break below the 100-day moving average near 1.3720 toward a fair-value target of 1.3690. RBC continues to favour fading rallies in the pair, with a one to three month target of 1.3500.

Fed Watch:

The Federal Reserve is expected to hold at its June 17 meeting. RBC forecasts the upper bound of the fed funds rate steady at 3.75% through the fourth quarter. With the inflation impulse still firm, market pricing leans toward a modest tilt to a hike rather than a cut over the balance of the year, and the odds of a December cut remain low. A sustained run of softer monthly inflation prints would be needed to reopen a credible case for an eventual return to easing.

Technical Picture:

Resistance: 1.3869 (yesterday's stall, RBC), then 1.3932 (the level that has capped all rallies this year)
Support: 1.3737 (a close below is needed to neutralise near-term topside risk, RBC), then 1.3720 (100-day moving average, CIBC), then 1.3571 (trendline, a break would reassert the broader downtrend)
Outlook: RBC continues to characterise the recent move higher as a corrective rally and favours fading it. The pair has given back this week's break above the 200-day moving average and is back in the low-1.38s. A close below 1.3737 would neutralise the near-term topside risk and align with the bearish view. RBC would reassess only on a daily close above 1.3932, the cap on this year's rallies.

Week Ahead:

With this morning's Canadian growth data out of the way, attention turns to next Friday's joint Canada and US employment reports, the broader anchor for the week ahead. The Bank of Canada decision on June 10 is then the next domestic catalyst, with a hold the consensus expectation.

Other Notes:

• The S&P 500 is on track for its ninth straight weekly advance, a run that has occurred only a handful of times in the past century.
• WTI has eased toward 87 dollars per barrel on optimism around a US-Iran agreement this weekend.
• Canadian business investment fell for a fifth consecutive quarter, a persistent drag beneath the headline growth weakness.
• Prime Minister Carney proposed a new partnership with the US in a New York speech, citing practical proposals on aluminum, auto manufacturing, and critical minerals including potash, nickel, copper, and uranium.