USD/CAD Market Update

Current Level: High-1.38s (24hr range 1.3836 to 1.3876)

Renewed military activity between the United States and Iran has tested the fragile ceasefire overnight, pushing crude oil more than 2% higher and reinforcing a safe-haven bid for the US dollar. USD/CAD has climbed to a fresh monthly high, closing at 1.3873 and breaking above the 1.3869 level that has capped the range for three weeks. Separately, the Office of the US Trade Representative announced a new round of duties that would place a 10% tariff on goods from Canada and several other partners, adding to the trade uncertainty weighing on the currency.

Market Overview:

Risk appetite is mixed to softer this morning. Higher oil prices and rising bond yields are weighing on equities after a historic rally, with stocks struggling to extend gains and participation narrow beneath the surface (CIBC). The US dollar is stronger across the G10 basket on the safe-haven bid (CIBC). WTI crude is trading back toward the US$95 per barrel mark, and yields are higher across the curve as the energy move feeds through into rates.

Middle East Re-Escalation Lifts Oil and the Dollar:

Renewed military activity between the United States and Iran has tested the so-called ceasefire overnight (CIBC). Reports point to the US intercepting Iranian missiles and drones and responding with strikes, pushing crude oil back toward the mid US$90s (CIBC). The core sticking point remains nuclear enrichment, with the two sides locked in a stalemate. Markets are largely brushing off the headlines for now, a pattern that has repeated for several sessions, but CIBC cautions that a prolonged disruption to the Strait of Hormuz could eventually force a sharp repricing of risk. Global energy inventories sit low enough to raise the risk of a non-linear move in prices if supply is interrupted further.

New US Tariff Round Targets Canada:

The Office of the US Trade Representative announced a new set of duties that would impose a 10% tariff on goods from Canada, Mexico, Taiwan, the United Kingdom and other partners, with higher rates applied to certain countries (Global News; USTR). The measures stem from a Section 301 investigation, opened in March, into the alleged failure to enforce prohibitions on goods made with forced labour. The action adds another layer of uncertainty for Canadian exporters already contending with trade friction in autos and other trade-sensitive sectors, and reinforces the cautious tone around the currency. Its ultimate scope and durability remain unclear, but the uncertainty alone is enough to keep businesses cautious and major pairs range-bound.

Canadian Data/Outlook:

The domestic backdrop remains soft. First-quarter GDP contracted at 0.1% annualised, placing the Canadian economy in a technical recession after the prior quarter's downwardly revised 1.0% decline. Final domestic demand and business investment were both weak, and the labour market has been losing momentum. Friday's May employment report is the next domestic catalyst, with consensus looking for approximately 10,100 new jobs and the unemployment rate steady at 6.9%, a rebound from April's 17,700 decline. The soft growth picture is not expected to alter Bank of Canada policy at the June 10 meeting. CIBC's Central Bank Watch shows markets pricing a 0% probability of a cut and a 1% probability of a hike, consistent with a fifth consecutive hold, with the overnight rate at 2.25%. The wide US-Canada front-end rate spread continues to act as a floor under USD/CAD.

Fed Watch:

The Federal Reserve next meets on June 17, which will be Kevin Warsh's first meeting as chair following his confirmation in May and the end of Jerome Powell's term. CME FedWatch shows roughly a 99% probability that the target range of 3.50 to 3.75% is left unchanged at that meeting, and CIBC's Central Bank Watch similarly shows a 0% probability of a cut and a 2% probability of a hike. Yesterday's JOLTS report showed job openings rising more than expected in April, reinforcing the picture of a resilient labour market, and this morning's ISM services index beat at 54.5 against a 53.7 forecast. Broader pricing continues to reflect a higher-for-longer posture, with markets assigning only around 15% odds to a single 25-basis-point cut by year-end. With Warsh now in the chair amid public pressure from the administration for lower rates, markets will watch his communication closely for any signal on the policy path, though the firm inflation and labour data leave little near-term case for easing.

Technical Picture:

Resistance: 1.3900 (the next psychological level above the recent break); 1.3932 (the cap on this year's rallies).
Support: 1.3869 (the level that capped the range for three weeks, now expected to act as support on a pullback); 1.3810 (the 200-day moving average).
Outlook: USD/CAD has broken above the 1.3869 level that contained the range for three weeks, closing at 1.3873 and reaching a fresh monthly high. The break keeps the near-term bias tilted higher toward 1.3900 and the 1.3932 rally cap, while a close back below 1.3869 would refocus attention on the 200-day moving average near 1.3810. CIBC strategists maintain a sell bias at current levels, reiterating a target of 1.3720 following Friday's payrolls report and 1.3400 by year-end, viewing the geopolitically driven strength as an opportunity for hedgers to sell US dollars at relatively attractive levels.

Week Ahead:

The dominant near-term event is Friday's dual employment report in Canada and the United States. A soft print on either side would reinforce the higher-for-longer narrative without materially raising cut expectations, given persistent inflation. The following week is heavier, with US CPI landing the same morning as the June 10 Bank of Canada decision, the ECB meeting on June 11, and the Federal Reserve decision on June 17.

Other Notes:

• The euro is underperforming most major currencies as traders downgrade euro-area growth expectations after a further contraction in private-sector activity in May. Markets continue to price a near-certain ECB rate hike at the June 11 meeting, with concern that tightening into a weak growth backdrop will weigh on the outlook.
• Oil prices are higher, with WTI crude trading back toward the US$95 per barrel mark as renewed Middle East tensions lift prices (CIBC).
• The US dollar index is holding near 99, consistent with the stabilization seen over recent weeks rather than a sustained breakout.
• US equity market breadth remains narrow beneath the index level, with demand for downside protection at cycle lows even as investors stay heavily positioned in risk (CIBC).