USD/CAD Market Update

Current Level: Mid-1.39s (24hr range 1.3933 to 1.3964)

USD/CAD is trading near 1.3952 this morning, little changed from Friday's close of 1.3942, after holding a narrow 1.3933 to 1.3964 range overnight. The pair is consolidating at its weakest levels since late June following Friday's employment driven break below 1.4000. The US dollar is modestly firmer against the G10 basket after last week's broad decline, and the calendar builds toward Wednesday's July CPI report.

Market Overview:

Risk appetite is mixed this morning. CIBC reports equity markets hovering near record highs ahead of Wednesday's CPI report, with the S&P 500 coming off another record close on Friday. Bond yields are slightly higher ahead of a heavy week of data and US Treasury supply. Earnings remain supportive, with CIBC noting quarterly earnings growth is on pace for the largest annual increase since the fourth quarter of 2021, per FactSet. The firmer US dollar has left USD/CAD marginally higher on the session, though the pair has retraced only a small portion of Friday's decline.

US Inflation Week: CPI Is the Main Event:

The US calendar is heavy this week, with July consumer prices on Wednesday, producer prices on Thursday and retail sales on Friday, all at 5:30 a.m. Pacific. CPI is the week's main event. Consensus looks for headline inflation of 3.4% on the year, down from 3.5% in June, with core CPI easing to 2.5% from 2.6%. CIBC economists expect the report to land broadly in line with consensus, an outcome that would leave current Fed pricing largely intact. The question for markets is whether July's negative payrolls print marks the start of a broader cooling that allows the Federal Reserve to stay on hold. CIBC flags an upside inflation surprise as the biggest risk for markets this week, since it would force investors to price a September hike more fully. On Friday, CIBC expects headline retail sales to be soft with control group spending holding up.

Trade Talks Dominate the Canadian Agenda:

With no major Canadian data scheduled this week, the domestic focus is the August 19 deadline in trade negotiations with Washington. The United States has threatened new tariffs of 50% on a range of Canadian imports beginning August 19 under Section 338. CBC reports Trade Minister Dominic LeBlanc and chief negotiator Janice Charette are in Washington as both sides intensify discussions. Possible Canadian concessions under discussion include counter tariffs on automobiles, provincial restrictions on US alcohol and elements of dairy supply management, according to BNN Bloomberg. Prime Minister Carney has described the talks as constructive, while industry sources caution that a deal by the deadline is not assured. Headlines from these negotiations are a two way risk for the Canadian dollar all week.

Hormuz Talks Stall, Crude Moves Higher:

Crude oil is higher after Iran and Oman failed to conclude their agreement on commercial shipping through the Strait of Hormuz. Bloomberg reports the wait for a deal is stretching on, with Iran insisting its terms must be met and Foreign Minister Araghchi ruling out direct talks with the United States for now, citing what Tehran describes as US violations of the June interim agreement. Iran has also said a bilateral arrangement with Oman would not by itself reopen the waterway while the US naval blockade remains in place. WTI crude is trading near US$79.30 per barrel, up more than 1% on the session, per Trading Economics. CIBC continues to view energy prices as the main upside risk to the inflation outlook, and firmer crude offers the Canadian dollar some incidental support while the diplomatic track stalls.

Canadian Data/Outlook:

There are no major Canadian economic releases scheduled this week. The next significant domestic input is the July CPI report on August 17. The Bank of Canada has held its policy rate at 2.25% for six consecutive announcements, and CIBC's Central Bank Watch puts the implied probability of a 25 basis point hike at the September 2 meeting at 5%, with no cut priced. With the calendar empty, CIBC expects the Canadian dollar to take its cues from US CPI, broader risk sentiment and trade headlines out of Ottawa and Washington.

Fed Watch:

The next decision lands September 16. CIBC's Central Bank Watch puts the implied probability of a 25 basis point hike at 46%, with no cut priced, up modestly from 43% on Friday in the wake of the July payrolls miss. CME FedWatch data cited by CNBC showed the odds of the Fed holding rates in September near 60% following the jobs report. Wednesday's CPI is the next release with the potential to move that pricing meaningfully in either direction, and CIBC strategists expect most of this week's USD/CAD movement to come from that print.

Technical Picture:

Resistance: 1.4000, the former floor that turned back recoveries three times between July 30 and August 6 and now acts as the first barrier on any bounce. Above that, 1.4082 marks the August 5 high.
Support: 1.3925, Friday's low and the weakest print since late June. Below that, 1.3900, where CIBC places the 200 day exponential moving average.
Outlook: The pair is consolidating rather than extending, holding a 31 pip overnight range after Friday's 105 pip break. CIBC strategists remain constructive on the Canadian dollar and see a soft CPI print, paired with a moderation in Fed hike pricing, as the trigger for a move toward 1.3900. Most of this week's directional risk is concentrated on Wednesday morning.

Week Ahead:

Wednesday's CPI report is the release most likely to set direction for the week. The following Monday brings Canada's July CPI, the first domestic data of consequence, and August 19 carries both the FOMC minutes and the US tariff deadline, making it the most consequential date on the Canadian calendar this month.

Other Notes:

• The Reserve Bank of Australia announces its decision tonight at 9:30 p.m. Pacific. All four major Australian banks forecast a hold at 4.35%, and market pricing puts the chance of a move in the low single digits.
• A heavy slate of US Treasury auctions accompanies this week's inflation data, adding a supply test for a bond market already leaning cautious ahead of CPI.