USD/CAD Market Update

Current Level: Mid-1.38s (24hr range 1.3797 to 1.3849)

USD/CAD has pushed back to the mid-1.38s to start the week, adding roughly 50 pips from Friday's close as geopolitical risk returns to the forefront. Iran announced that it is halting exchanges with the United States in protest at Israel's expanded ground operations in Lebanon, with reports that Iran and affiliated regional actors have placed the complete closure of the Strait of Hormuz and the Bab al Mandab Strait on their agenda. Oil prices are up roughly 3%. The ISM Manufacturing PMI for May beat expectations at 54.0 this morning, but the underlying detail showed input and output cost pressures accelerating sharply.

Market Overview:

Risk appetite is fragile to start the week. US equity markets are modestly lower, pausing after the S&P 500 recorded nine consecutive weekly advances. The US dollar is broadly stronger across the G10 on a safe-haven bid from the Iran headlines and higher oil prices. The US 30-year Treasury yield has pushed back above 5.00%. WTI crude is up roughly 3% as the market prices renewed supply-chain risk from Strait of Hormuz disruption. USD/CAD's move is reflecting the geopolitical bid rather than any fundamental shift in the relative rate outlook.

Iran Tensions Re-Escalate, Strait of Hormuz in Focus:

Iran announced that it is halting diplomatic exchanges with the United States in protest at Israel's expanded ground assault in Lebanon. Reports indicate that Iran and affiliated regional actors have placed the complete closure of the Strait of Hormuz and the Bab al Mandab Strait on their operational agenda (Bloomberg, via CIBC). The Strait of Hormuz has been largely restricted to shipping since the outbreak of conflict in late February, with a fragile ceasefire agreed in April that is now showing signs of strain. President Trump stated he is in no hurry to agree to terms that would reopen the waterway. CIBC flags dangerously low global energy inventory levels as a factor that raises the risk of a non-linear oil price spike in coming weeks.

ISM Manufacturing Beats, Cost Pressures Accelerate:

The ISM Manufacturing PMI for May came in at 54.0, above the 53.3 consensus and up from 52.7 in April. This is the highest reading since May 2022 and marks the fifth consecutive month of expansion in the sector. New Orders rose to 56.8 from 54.1 in April. However, both input costs and output charges rose at their fastest pace in nearly four years, and export orders declined for the eleventh consecutive month, reflecting sustained pressure from geopolitics and tariffs. Companies are stockpiling inventory in anticipation of further Middle East-related supply chain disruptions. The headline beat is constructive for US economic resilience, but the cost-pressure detail adds to the stagflation narrative the Federal Reserve is navigating.

Canadian Data/Outlook:

The Canadian economic backdrop remains soft following last Friday's first-quarter GDP print, which contracted at -0.1% annualized against expectations near +1.5%. After a downwardly-revised contraction of -1.0% in the fourth quarter of 2025, the economy is in a technical recession. CIBC Economics notes that private sector hiring remains weak ahead of this Friday's employment report for May. Consensus forecasts call for approximately 10,200 new jobs with the unemployment rate steady at 6.9%. CIBC's own estimate is higher at 15,000, flagging that temporary census hiring may flatter the headline. Regardless of the outcome, the soft underlying trend is unlikely to alter Bank of Canada policy expectations at the June 10 meeting. Bond markets are pricing a 2 to 3% probability of a hike and near-zero probability of a cut at that meeting (CIBC Central Bank Watch; rateprobability.com), with the BoC's overnight rate currently at 2.25%.

Fed Watch:

The Federal Reserve is not meeting until June 17, and market pricing continues to reflect a higher-for-longer posture. CME FedWatch data shows approximately 78% probability that the current target rate range of 3.50 to 3.75% remains unchanged through December 2026, with around 15% odds of a single 25-basis-point cut and roughly 5% odds of a hike by year-end. CIBC economists expect the US labour market to remain in a "low hire, low fire" regime, with a potential rate cut in the fourth quarter only if the oil shock subsides. Today's ISM Manufacturing beat, combined with sharply rising cost pressures, adds further complexity to the Fed's path and reduces the case for near-term easing.

Technical Picture:

Resistance: 1.3869 (key level capping the range over the past several sessions); 1.3932 (secondary level).
Support: 1.3799 to 1.3797 (today's session low, near-term base); 1.3728 (prior range low).
Outlook: USD/CAD has recovered to the mid-1.38s on the geopolitical bid, with the near-term range bracketed by 1.3799 support and 1.3869 resistance. CIBC strategists maintain a sell bias on USD/CAD at current levels, targeting 1.3720 by end of week and 1.3400 by year-end, viewing the geopolitically-driven lift as an opportunity for hedgers to sell USD at relatively attractive levels.

Week Ahead:

The dominant event of the week is Friday's dual employment report in Canada and the United States. CIBC looks for 15,000 new Canadian jobs (consensus 10,200) with the unemployment rate steady at 6.9%, noting that temporary census hiring may flatter the headline. For the US, CIBC's own estimate of 80,000 non-farm payrolls sits below the 95,000 consensus. A soft print on either side would reinforce the higher-for-longer narrative without increasing cut expectations, given persistent inflation. The June 10 Bank of Canada decision and US CPI report, followed by the ECB on June 11, will dominate the following week.

Other Notes:

• The euro is holding ahead of Tuesday's Eurozone CPI release. Markets are pricing approximately 95% odds of an ECB rate hike at the June 11 meeting, with headline inflation expected to accelerate to 3.3% year-over-year. Despite the hawkish pricing, the euro has struggled to gain ground against the dollar, reflecting concern that the inflation-suppression cost will weigh on growth.
• DXY is trading near 99, still below key resistance at the 100-month moving average near 99.70 and the 20-month moving average at 100.94. The broader dollar picture reflects stabilization rather than a sustained breakout from the sharp decline off late-2024 highs near 109.
• The S&P 500 recorded nine consecutive weekly advances into last Friday's close, a run that has occurred only 13 times in the past century. Equity markets are modestly lower today as geopolitical risk reasserts itself at the start of the month.