USD/CAD Market Update

Current Level: High-1.40s (24hr range 1.4054 to 1.4090)

USD/CAD is trading in the high-1.40s this morning near 1.4084, up from Monday's close of 1.4072 and back at the top of this month's range after the United States imposed new tariffs on a range of Canadian goods. The pair has recovered roughly 80 pips from last week's monthly low near 1.4003, lifted by the tariff headlines and by yesterday's softer than expected Canadian inflation report. Risk appetite is firmer, with semiconductor stocks extending their relief rally, while crude holds near recent highs as US and Iran strikes reach a tenth consecutive day.

Market Overview:

Risk sentiment has improved. CIBC reports equities opening higher as dip buyers return to the semiconductor space and investors position for a heavy week of Big Tech earnings. The US dollar is firm across the G10, with the tariff story and steady US yields lending it support. Global bond yields are mixed with no major moves worth reporting. Energy markets are supported as US and Iranian forces exchange strikes for a tenth straight day, with the Strait of Hormuz still the key supply risk. The dominant event in the window is the Federal Reserve decision on July 29, with the European Central Bank on Thursday the nearer term risk.

Tariffs Return:

The top story of the day is a fresh round of US tariffs on Canada. President Trump signed three proclamations invoking Section 338 of the 1930 Tariff Act, a provision that permits duties of up to 50% and that, according to the White House and market reporting, has effectively gone unused since 1949. The measures apply a 50% levy to a range of Canadian goods including dairy, alcoholic beverages and motor vehicles, and are scheduled to take effect in roughly 30 days, on August 19. In a notable escalation, goods that comply with the USMCA are not exempt. Energy, potash, critical minerals, fish and products already covered by Section 232 steel and aluminium duties are carved out, which leaves Canada's largest exports to the United States untouched. Markets have largely looked through the announcement. CIBC notes that investors remain reluctant to price a lasting impact, given the administration's history of walking back aggressive tariff proposals, the pattern traders have labelled the TACO trade, and reads the muted reaction as a sign the market sees a negotiating tactic rather than the start of a broader trade conflict. CIBC adds that the news has not changed its strategists' forecasts for either USD/CAD or the Bank of Canada.

Canadian Data/Outlook:

Yesterday's June inflation report remains fresh in the background. Statistics Canada reported headline CPI at 2.8% year over year, below consensus, while the Bank of Canada's preferred core measures softened further, with trimmed CPI at 1.8% and median CPI at 1.9%, both below 2.0% for the first time in nearly six years. The data reinforces a Bank of Canada that is comfortably on hold rather than one preparing to move. CIBC's central bank watch shows a 7% implied probability of a 25 basis point hike at the September 9 meeting and no chance of a cut. CIBC strategists remain constructive on the Canadian dollar despite the tariff noise and continue to look for a move toward 1.4000 and below.

Fed Watch:

Markets expect the Federal Reserve to hold rates at its July 29 meeting. CME FedWatch priced the odds of no change at 86.7% as of July 20, with a quarter point hike near 13% and no cut on the table. CIBC's own central bank watch is a little more hawkish, showing a 19% implied probability of a hike at that decision. Softer US inflation and labour market data through the first half of July have taken the clearest argument for near-term tightening off the table, and the repricing leaves the dollar leaning on rate differentials rather than the prospect of further hikes. With the decision a week away, positioning and the earnings tape are likely to carry more weight than the light interim data calendar.

Technical Picture:

Resistance: 1.4090 caps the near term, the session high, followed by the 1.4100 round number and 1.4155, the July 14 high.
Support: 1.4054, the session low, sits just below spot, ahead of the 1.4000 psychological level and the pivotal cluster at 1.3981, a Fibonacci retracement, and 1.3970, the 50-day moving average.
Outlook: The pair has reclaimed the 1.4078 level that capped it through last week and pushed back to the top of the range, the first break of that near-term resistance since the two-week decline began. A sustained move above 1.4100 would open 1.4155, while a failure to hold above 1.4078 would put the 1.4000 handle and the 1.3981 to 1.3970 support zone back in focus. That zone still has not been tested and remains the line in the sand for the broader trend. CIBC strategists continue to favour USD/CAD downside over the medium term, targeting the 1.3700 to 1.3800 area, arguing that positioning is heavily short the Canadian dollar and that domestic data has quietly improved.

Week Ahead:

The Federal Reserve decision on July 29 is the dominant event in the window and the main risk to dollar direction, with a hold the strong consensus. The European Central Bank on Thursday is widely expected to leave its main refinancing rate at 2.40%, leaving the statement and press conference as the market moving element. July 30 is the heaviest day of the period, pairing the Bank of England and Bank of Japan decisions with US advance GDP and core PCE, and Canada's monthly GDP on July 31 closes out the stretch and matters more than usual now that core inflation has slipped below target.

Other Notes:

• Oil is firmer, with Brent near $89.22 and West Texas Intermediate near $83.23 after both settled higher on Monday, as US and Iran hostilities keep the Strait of Hormuz in focus, according to CNBC. Reduced tanker traffic through the strait remains the key supply risk and, at the margin, a support for the Canadian dollar.
• CIBC highlights that US investors now owe roughly $1 trillion more in margin debt than they hold in cash, citing FINRA data. Heavily leveraged markets can stay elevated for long stretches but grow more sensitive to negative surprises as positioning stretches, a risk worth watching as Big Tech earnings arrive this week.
• USD/CAD is back at the top of a band that has broadly held between 1.4000 and 1.4155 this month. The tariff driven bounce has reversed much of last week's grind lower without changing the medium term picture, and the July 29 Federal Reserve decision looms as the more likely catalyst for the next decisive move.