USD/CAD Market Update

Current Level: Mid-1.38s (24hr range 1.3851 to 1.3872)

USD/CAD is trading near 1.3855, down 21 pips from Friday's close of 1.3876, inside a 1.3851 to 1.3872 range. July Canadian consumer prices rose 3.0% on the year against a 2.9% consensus, and CIBC reports the pair falling to multi-month lows on the release. The move extends Friday's break of 1.3900 and takes the pair down to the 200 day moving average, the last technical reference before CIBC's 1.3700 year end target. The US dollar is also weaker across the G10 basket, so the Canadian dollar is being helped by both legs of the trade at once.

Market Overview:

Risk appetite is mixed. CIBC reports equities trading without clear direction as investors weigh the firmer Canadian inflation print against rising global bond yields, with the major indices still holding near record highs. The US dollar is weaker against the G10 basket, and CIBC reports continued selling of the currency following last week's soft US inflation and retail sales data. That is the same pattern that drove Friday's session. Rates markets have priced the Federal Reserve out of a near term move, and the US dollar rather than the Treasury curve is absorbing the adjustment. Crude is offering neither support nor drag today, with WTI near US$82 per barrel, per fxdailyreport. Today's move in the Canadian dollar is therefore an inflation and US dollar story rather than an energy story, which is a change from most of last week.

Canadian Inflation Reaches the Top of the Bank of Canada's Range:

Headline consumer prices rose 3.0% on the year in July, up from 2.8% in June and above the 2.9% consensus, with prices up 0.5% on the month, according to Statistics Canada as reported by Reuters. That puts inflation at the ceiling of the Bank of Canada's 1% to 3% control range for the first time this year. The composition is narrower than the headline suggests. Gasoline prices rose 25.7% on the year after a 20.5% increase in June, and that single line does most of the work. Travel tours and airline fares were also firmer, reflecting higher fuel costs alongside summer travel demand and the FIFA World Cup, per CIBC. Excluding food and energy, prices rose 1.9% on the year. The Bank of Canada's preferred measures stayed close to target, with CPI trim at 1.9% and CPI median at 2.0%, up from 1.9%. CIBC's read is that the headline overstates the case, that the story barely changes once gasoline is removed, and that its strategists continue to forecast no change in the overnight rate until the first or second quarter of 2027.

Tariff Deadline Two Days Out:

Section 338 tariffs of an additional 50% take effect at 12:01 a.m. Eastern on Wednesday, August 19, covering roughly US$20 billion of Canadian exports across 554 tariff lines. Talks ran through the weekend. Trade Minister Dominic LeBlanc and chief negotiator Janice Charette spent the weekend in Washington, and LeBlanc met US Trade Representative Jamieson Greer virtually on Sunday for about an hour in a session both sides described as constructive, per CP24 and Canada's National Observer. That was the fifth meeting between the two since the tariff threat was issued. The reporting on how close the sides actually are is not consistent. Quebec Economy Minister Bernard Drainville said after a Friday briefing that the parties appeared far from an agreement, while other coverage has the two governments moving toward a framework to put in front of the President before the deadline. The Globe and Mail reports that Canada's chief negotiator told US counterparts the tariffs taking effect could halt the talks altogether. This remains the largest two way risk for the Canadian dollar this week, and it is capable of overriding anything on the data calendar. Note that today's CIBC commentary does not cover the file, so the framing above comes from public reporting rather than from bank research.

The Long End Is Not Following Inflation Lower:

Global bond yields are higher, and CIBC reports the US 30 year Treasury yield climbing to its highest level since 2007. The long bond closed at 5.27% on July 31, a level last seen before the financial crisis, per Seoul Economic Daily. The 10 year yield ended last week near 4.7%, not far from the 19 month high of 4.75% tested earlier in the week, per Trading Economics. What makes the move notable is what has failed to reverse it. Two soft US inflation reports and a 0.6% decline in July retail sales would ordinarily produce a rally at the long end. Instead investors are focused on fiscal deficits, the volume of new government supply, and higher energy costs. CIBC's take is direct: inflation may be cooling, but long term borrowing costs are still rising. For USD/CAD the implication is that the US dollar, not the Treasury curve, is carrying the full adjustment from softer US data. That is part of why the pair has fallen 76 pips since Thursday's close of 1.3931.

Canadian Data/Outlook:

This morning's CPI report is the domestic input for the week. 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%, with no cut priced. That is unchanged from Friday, so the inflation report did not shift domestic rate expectations. A headline at the top of the control range with trim at 1.9% and median at 2.0% is not the combination that moves a central bank already comfortable on hold. The next Canadian release of consequence is monthly GDP on August 28. Between now and then the currency takes its direction from the tariff file and from the US leg of the trade.

Fed Watch:

The next decision lands September 16. CIBC's Central Bank Watch puts the implied probability of a 25 basis point hike at 30%, down from 31% on Friday, with no cut priced. CME FedWatch data as of August 14 showed a 69% probability that the Federal Reserve holds in September, which is consistent with that reading. The July FOMC minutes on Wednesday are the week's main US event, and CIBC frames the question as how close policymakers came to hiking in July and what would trigger another move. CIBC's view is that unless Tuesday's July housing starts report delivers a major surprise, attention stays on the Fed and on whether policymakers sound as comfortable with a prolonged pause as investors currently assume. Jackson Hole follows on August 27 to 29, and the August employment report in early September remains the release with the most capacity to move this pricing.

Technical Picture:

Resistance: 1.3872, today's high, is the first level sellers defend. Above that, 1.3900, the zone that broke on Friday and where CIBC previously placed the 200 day exponential moving average, then 1.3941, the August 12 close and the base of last week's range.
Support: 1.3850, the 200 day moving average CIBC identifies as the next obvious support, which today's 1.3851 low has already tested. Below that there is little structure until 1.3700, CIBC's year end target.
Outlook: The pair is sitting on the level that decides the next leg. CIBC's framing is that if 1.3850 gives way, 1.3700 could arrive sooner than expected. The pair has closed lower in each of the last three trading sessions and has not held a bounce since the retail sales report, so the near term bias is lower. The offsetting consideration is Wednesday's tariff deadline, a binary event and the one item on the calendar capable of forcing a sharp reversal higher.

Week Ahead:

Wednesday carries both of the week's binary events. The tariff deadline lands at 12:01 a.m. Eastern and the FOMC minutes follow at 11:00 a.m. Pacific, so the Canadian dollar faces a domestic political risk and a US rates risk within the same session. The Bank of Canada's next decision on September 2 sits just outside this window and is currently priced for no change.

Other Notes:

• Copper is leading the commodity complex higher. LME cash copper is near a record and the spot price has traded as much as US$543.50 per tonne above the three month contract, the widest gap since the 2021 squeeze, with LME inventories down roughly 14% since July 31, per Bloomberg. CIBC reads the move as evidence of tight physical supply and firm demand rather than a recession signal.
• WTI crude is near US$82 per barrel and broadly steady, per fxdailyreport, so the energy offset that cancelled out several of last week's sessions is absent today.
• Equity markets are slightly higher, with the major indices continuing to trade near record highs, per CIBC.