USD/CAD Market Update

Current Level: Mid-1.40s, little changed after the Bank of Canada held at 2.25% (24hr range 1.4040 to 1.4078)

USD/CAD trades in the mid-1.40s this morning, holding near yesterday's close after the Bank of Canada left its policy rate unchanged at 2.25%, as markets and both banks had expected. The pair extended to a fresh low at 1.4040 overnight before steadying near 1.4057, with the decision producing almost no net movement. Softer than expected US producer prices are the more consequential input today, adding to Tuesday's downside inflation surprise and keeping the US dollar on the back foot. Governor Macklem and Senior Deputy Governor Rogers take questions at 7:45am Pacific, the next scheduled event that could move the pair.

Market Overview:

Risk appetite is supported this morning. Equities opened higher as another round of strong US bank earnings lifts sentiment, while US Treasury yields are lower as the soft producer price data reinforces the view that inflation pressures remain contained, according to CIBC. The US dollar is lower against the entire G10 basket on the back of the same report. For USD/CAD, a broadly weaker dollar and firmer crude are working in the Canadian dollar's favour, though the pair has so far declined to break decisively below the 1.4040 area.

Bank of Canada Holds and Sounds More Constructive:

The Bank of Canada kept its overnight rate at 2.25%, a sixth consecutive hold, and delivered what CIBC characterises as a neutral to constructive message. Policymakers said economic growth has been weak but is now showing signs of improvement, and they suggested economic slack should gradually be absorbed as growth picks up. That is a notable shift from earlier guidance that excess supply would persist. The accompanying Monetary Policy Report cut this year's GDP growth forecast to 0.7% from 1.5%, while lifting next year's to 1.8% from 1.6%. The Bank also raised its 2026 inflation forecast to 2.5% from 2.3% and warned there is a real risk inflation gets stuck above 2%, though its base case remains for CPI to return to target during 2027 with long-term expectations well anchored. CIBC's read is that policymakers removed some of the more pessimistic language around the economy without clearing the bar for rate hikes, and it left its forecasts unchanged.

Soft US Producer Prices Extend the Dollar's Decline:

US producer prices fell 0.3% in June, according to the Bureau of Labor Statistics, as a 1.4% drop in final demand goods prices, the largest since July 2022, outweighed a 0.2% rise in services. Gasoline prices fell 12% and accounted for roughly two thirds of the monthly decline. Core producer prices excluding food and energy rose 0.2% against a 0.3% consensus, and the measure excluding food, energy and trade services rose just 0.1% after a 0.8% jump in May. On an unadjusted basis final demand prices were up 5.5% over the twelve months to June. CIBC reports the softness pushed Treasury yields and the greenback lower across the G10. Coming a day after a downside surprise in June CPI, the report reinforces the case that the Federal Reserve has no near-term reason to tighten.

Canadian Data/Outlook:

With the decision now in hand, the domestic focus shifts to the press conference at 7:45am Pacific, where Macklem and Rogers will be pressed on the Bank's read on trade risk and on how much confidence sits behind the improved outlook. CIBC's Central Bank Watch shows implied odds of a 25 basis point hike at the September 9 meeting at 12%, with no cut priced, consistent with a Bank that is comfortable on hold and data dependent from here. The muted price action in the Canadian dollar suggests traders were well positioned for this message. Canada's June CPI on July 20 is the next domestic test, with the trimmed and median core measures at 2.0% and 2.1% year over year previously.

Fed Watch:

Federal Reserve expectations have continued to unwind. CIBC's Central Bank Watch now shows an 11% implied probability of a 25 basis point hike at the July 29 meeting, down from 13% yesterday and 35% on Monday, with no cut priced. That repricing is corroborated by CME FedWatch readings reported since Tuesday's CPI, which put July hike odds in the high single digits to below 20%, sharply lower than the roughly 40% to 46% priced before the inflation data. Two consecutive soft inflation prints have removed the clearest argument for tightening this month. Fed Chair Warsh continues his congressional testimony today.

Technical Picture:

Resistance: 1.4078, today's high, then 1.4100, the prior support shelf that now caps the pair, with 1.4155 beyond.
Support: 1.4040, today's low, then 1.4000, the psychological level CIBC identifies as the next major layer, and 1.3981, the 38.2% Fibonacci retracement.
Outlook: USD/CAD has spent the session in a narrow 38 pip band around yesterday's close, with the Bank of Canada decision failing to break it out. The short-term bias stays lower after last week's break of the 1.4100 shelf, and CIBC's strategists maintain a bearish bias, favouring a near-term move below 1.4000. A sustained break of 1.4040 would put the 1.4000 handle in play and expose 1.3981. On the topside, 1.4078 and 1.4100 cap the near-term range, and a recovery above 1.4100 would call the downtrend into question. The press conference is the immediate risk to this range.

Week Ahead:

With the Bank of Canada now behind the market, the July 29 Federal Reserve decision moves into the two-week window and becomes the key event for dollar direction. Canada's June CPI on July 20 is the next domestic input and matters more than usual given the Bank's warning that inflation could get stuck above 2%. The European Central Bank on July 23 rounds out the period. The immediate risk today is the Bank of Canada press conference.

Other Notes:

• WTI crude is trading near US$80 per barrel, with energy markets higher on escalating US-Iran tensions and disruptions in the Strait of Hormuz, according to CIBC. CNBC reports US forces struck Iranian targets again and Washington reinstated a naval blockade of Iranian ports near the strait, which carries roughly 20% of global oil exports. Firmer crude sustains the terms-of-trade support underpinning the Canadian dollar.
• US Treasury yields are lower and equity markets mostly higher, with another round of strong financial sector earnings offsetting concerns around growth and valuations, according to CIBC.