USD/CAD Market Update

Current Level: Mid-1.39s (24hr range 1.3930 to 1.3958)

USD/CAD is trading near 1.3937, four pips below Wednesday's close of 1.3941, inside a 1.3930 to 1.3958 range. July producer prices were unchanged on the month against a 0.2% consensus, the second downside inflation surprise of the week, and CIBC reports the US dollar slightly weaker against the G10 basket. The Canadian dollar has taken none of that benefit, because crude reversed at the same time. The two forces have cancelled each other out and left the pair effectively unchanged.

Market Overview:

Risk appetite is constructive. CIBC reports equities moving higher and bond yields easing after the inflation report, with the S&P 500 trading within reach of record highs. The index rose 0.29%, the Dow Jones Industrial Average 0.24%, the Nasdaq 0.23% and the Russell 2000 0.61%, according to Bloomberg. The two year Treasury yield, the most sensitive point on the curve to near term Fed moves, fell six basis points to 4.14%. That is the cleanest expression of what the data did. Rates markets moved, equities followed, and the US dollar softened modestly across the majors without any disorderly repricing.

Producer Prices Confirm the CPI Signal:

Final demand producer prices were unchanged in July against a 0.2% consensus, following a 0.3% decline in June. The annual rate slowed to 4.7% from 5.5%, below the 4.9% expected. Core producer prices rose 0.2% on the month against 0.3% expected, with the annual core rate at 4.2%, according to the Bureau of Labor Statistics and CNBC. The composition matters. Final demand goods fell 0.7%, with energy down 3.1%, gasoline down 5.7% and food down 0.9%, while services rose 0.2%. The disinflation in this report is energy led, which makes it the component most exposed to the Middle East supply question. CIBC's read is that both this week's inflation reports have removed fears of a near term reacceleration, that September now looks like a hold barring an unusual development, and that attention shifts to the central bank symposium at Jackson Hole later this month.

Crude Reverses and Removes the Canadian Dollar's Support:

Energy had been carrying the Canadian dollar all week, and today it stopped. WTI crude is near US$82.11 per barrel, down 1.4% on the session, with Brent near US$87.92, down 1.2%, per Trading Economics. Both traded materially lower intraday, with WTI down as much as 2.2% near US$81.41. The move is demand driven rather than supply driven. The International Energy Agency's monthly report still sees a global shortfall of 1.8 million barrels per day this quarter while the Middle East conflict continues, so the supply case has not changed. What changed is the market's willingness to hold the risk premium. That reverses Monday's rally of roughly 5% and the US$82.25 level that supported the Canadian dollar on Tuesday. CIBC's framing is that traders remain focused on actual flows through the Strait of Hormuz rather than the diplomatic headlines, and that crude remains the hardest of the macro variables to price.

Trade Talks Harden Six Days From the Deadline:

The tone out of the negotiations turned firmer this week. CBC reported Wednesday that the two sides are not yet at a point where a deal can be reached, and that Canadian officials are not satisfied with the latest US offer. That is a step back from Tuesday, when the Canadian Chamber of Commerce described a path forward for an interim agreement. Minister Dominic LeBlanc and US Trade Representative Jamieson Greer are working on a proposal to put in front of the President before the deadline, per BNN Bloomberg. Canada is seeking relief on the Section 232 tariffs covering steel, aluminum, lumber and autos. Washington's asks are unchanged: counter tariffs on US built cars, dairy quota administration, and provincial restrictions on US alcohol. The alcohol file runs through the provinces rather than Ottawa, which limits how quickly that concession can be delivered. Absent an agreement, Section 338 tariffs of an additional 50% take effect at 12:01 a.m. Eastern on August 19, covering roughly US$20 billion of Canadian exports across 554 tariff lines. This remains the dominant two way risk for the Canadian dollar, and it is now larger than anything left on the US calendar.

Canadian Data/Outlook:

There are no Canadian releases today. The next domestic input is July CPI on Monday, August 17, where the previous readings were 1.9% on the median measure and 1.8% on the trimmed measure, with headline prices down 0.4% on the month in June. 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 2%, unchanged from Wednesday, with no cut priced. Domestic rate expectations have been flat for three sessions. That leaves USD/CAD taking its direction from the US leg of the trade, from crude, and from the tariff file.

Fed Watch:

The next decision lands September 16. CIBC's Central Bank Watch puts the implied probability of a 25 basis point hike at 34%, with no cut priced, down from 37% on Wednesday. Money markets are pricing roughly 35% for a September hike, against roughly 50% earlier this week, according to Bloomberg. That is a long way from the roughly 82% priced immediately after last month's statement. The repricing began with the July employment report on August 7, which showed the economy shedding 23,000 jobs against a consensus of 83,000, with May and June revised down by a combined 103,000. This week's two inflation reports removed the offsetting argument. The next scheduled inputs are the FOMC minutes on August 19 and Jackson Hole later this month, and neither is likely to move pricing as much as the August employment report in early September.

Technical Picture:

Resistance: 1.3958, today's high. Above that, 1.3967, the August 10 high that has capped the pair for four sessions, with 1.4000 the larger barrier.
Support: 1.3930, today's low. Below that, 1.3907, Wednesday's low and the weakest print since late June, then 1.3900, where CIBC places the 200 day exponential moving average.
Outlook: Wednesday's break did not hold. The pair traded to 1.3907, then closed at 1.3941, recovering the entire move, and today's 1.3930 low sat back above the 1.3925 shelf that was supposedly cleared. Range is contracting, 28 pips today against 42 on Wednesday, and the last four sessions have all resolved inside a 60 pip band between 1.3907 and 1.3967. A downside break that gets reclaimed the same day on two consecutive attempts is a market with sellers who are not being paid. CIBC strategists continue to target 1.3700 by year end on cooling US growth and easing inflation. The path there runs through the tariff outcome on August 19, not through the remaining US data.

Week Ahead:

Friday's retail sales report is the last meaningful US input this week, and consensus looks for a modest gain with the consumer holding up. For USD/CAD the two dates that matter are Monday's Canadian CPI and Wednesday's tariff deadline. Both land inside six sessions, and the second of them is binary.

Other Notes:

• The Japanese yen is near 159.36, approaching the 160 level. Prime Minister Takaichi's government supports a Bank of Japan rate increase as soon as September or October, per Bloomberg. The policy rate has been at 1.0% since June, the highest since 1995. CIBC's view is that intervention alone is losing effectiveness and that traders will keep testing the authorities until rhetoric is backed by higher rates.
• Gold extended its advance toward US$4,400 per ounce following the producer price release, per TradingKey.
• South Korea's KOSPI has entered a technical bull market, up roughly 22% from its July lows, with Samsung and SK Hynix leading, according to CIBC. The July selloff forced deleveraging across the memory chip names, and a good deal of that supply is still positioned to sell into strength.