USD/CAD Market Update

Current Level: Mid-1.38s (24hr range 1.3862 to 1.3881)

USD/CAD is trading near 1.3874, up 4 pips from Monday's close of 1.3870, inside a 1.3862 to 1.3881 range. That is a 19 pip session and the tightest range in over a week. It is not an accident. Section 338 tariffs of an additional 50% take effect at 12:01 a.m. Eastern tomorrow, negotiators are still apart on autos, and the market is declining to take a position ahead of a binary outcome. CIBC reports the US dollar little changed against the G10 basket with attention firmly on the Canadian dollar ahead of the deadline.

Market Overview:

Risk appetite is fragile. CIBC reports equities under pressure as investors react to rising global bond yields, with the Nasdaq down more than 1%. Yahoo Finance has the Nasdaq off 1.02%, the S&P 500 down 0.44% and the Dow down 0.21%. This is a rates move rather than a growth move. The US 30 year Treasury yield is up 2 basis points at 5.32%, the highest since 2007, and the 10 year sits at 4.74%, per Bloomberg. Crude is the second pressure point. Brent is at US$91 per barrel and WTI near US$84 after the US-Iran memorandum of understanding lapsed on Monday without an extension. For USD/CAD the two forces largely cancel. Higher US yields support the US dollar, higher crude supports the Canadian dollar, and the pair has gone nowhere. There is no domestic Canadian data today and no Fed speakers are scheduled.

Tariff Deadline Is Now Hours Away:

The additional 50% duties take effect at 12:01 a.m. Eastern on Wednesday, August 19. CIBC puts the exposure at roughly US$28 billion of Canadian exports, while CTV News and Canada's National Observer report US$20 billion. Published estimates span that range depending on which tariff lines are counted, and the measures apply whether or not a good qualifies under USMCA, per Holland & Knight. Autos remain the key sticking point, per CIBC, alongside dairy and alcohol. The weekend produced meetings but no agreement. Trade Minister Dominic LeBlanc met US Trade Representative Jamieson Greer in Washington on Monday and said afterwards that talks are ongoing and the job is not yet done, per Global News and BNN Bloomberg. Prime Minister Mark Carney spoke with President Trump by phone on Monday afternoon and described the negotiations as very intense and delicate, per CTV News, adding that Ottawa has a plan covering all eventualities if the tariffs land. CBC reports Canada is not satisfied with the latest US offer. CIBC's read is that markets have grown desensitized to tariff threats, which implies an agreement would move the Canadian dollar more than a stalemate would. Today's price action supports that view, because the pair has built no visible risk premium into the deadline.

The Global Long End Keeps Selling Off:

CIBC reports the US 30 year Treasury yield above 5.3%, the highest since 2007, and the Japanese 30 year at 4.14%, its highest since the mid 1990s. Bloomberg puts the US long bond at 5.32%, up 2 basis points on the session and a 19 year high. The composition matters more than the level. CIBC attributes the selloff to a rising term premium rather than to higher inflation expectations, which makes this a fiscal and supply story rather than a repricing of the central bank path. Investors are focused on government spending, elevated deficits, and a shrinking pool of natural buyers at the long end as pension demand declines and central banks step back. This is now the third consecutive report in which the long end has refused to follow softer US data lower. Two soft US inflation prints and a 0.6% decline in July retail sales have produced no rally in long bonds. The FX consequence is unchanged from last week. The US dollar, not the Treasury curve, is absorbing the full adjustment from weaker US data, which is why the currency has been the more responsive instrument all month.

Crude Reprices the Iran Risk:

The memorandum of understanding signed in June, which gave both sides 60 days to negotiate a longer term agreement, expired on Monday without an extension, per Al Jazeera and CNBC. Brent has risen for a third consecutive session to US$91 per barrel and WTI is near US$84, per Yahoo Finance, after President Trump ruled out extending the interim arrangement and signalled further economic pressure on Iran. CIBC also flags reports that Oman has warned diplomatic progress is deteriorating. CNN reports Trump threatened Oman over its role in the Strait of Hormuz file, while Iranian officials say a transit route map has been agreed with Oman without a final agreement in place. Crude at these levels is a terms of trade positive for Canada and is the main reason the Canadian dollar has held its recent gains through a session of broad risk aversion. It also complicates the inflation picture on both sides of the border, since energy did most of the work in Canada's 3.0% July headline print.

Canadian Data/Outlook:

There is no domestic release today. Monday's July consumer price report put headline inflation at 3.0% on the year, at the ceiling of the Bank of Canada's 1% to 3% control range, with CPI trim at 1.9% and CPI median at 2.0%. The core measures are what the Bank reacts to and they are at target. The policy rate is 2.25%. CIBC's Central Bank Watch puts the implied probability of a 25 basis point hike at the September 2 meeting at 3%, up from 2% on Monday, with no cut priced. Bond market pricing reviewed by RBC Economics is consistent, showing a very high probability of no change on September 2 and no meaningful cut probability until the October 28 decision, at roughly one in three. The next domestic release is retail sales on Friday, followed by monthly GDP on August 28. Neither is likely to matter beside the tariff outcome.

Fed Watch:

The next decision lands September 16. CIBC's Central Bank Watch now shows a 35% implied probability of a 25 basis point hike, up from 30% on Monday, with no cut priced. CME FedWatch data as of August 14 showed a 69% probability of a hold, which is consistent with that reading. Today's US data cut the other way. July housing starts fell 12.4% to a seasonally adjusted annual rate of 1.239 million against consensus near 1.35 million, with single family starts down 9.9% to 808,000, per Census Bureau data reported by Reuters. Single family permits rose 2.5% to 894,000, so the forward looking component is not deteriorating at the same pace. CIBC characterised today's calendar as second tier, and that note was written before the release. A housing miss of this size does not on its own move September pricing, but it is the third consecutive soft US activity reading after retail sales and Michigan sentiment. The July FOMC minutes tomorrow at 11:00 a.m. Pacific are the week's main US event, with Jackson Hole following on August 27 to 29.

Technical Picture:

Resistance: 1.3881, today's high and the top of a four session range. Above that, 1.3900, the level that broke on Friday and has not been recovered, then 1.3941, the August 12 close and the base of last week's range.
Support: 1.3848, the 200 day moving average CIBC identifies as the level where its strategists expect support. Monday's 1.3844 low pierced it intraday without a close below. Beneath that there is little structure before 1.3700, CIBC's year end target, which its strategists reaffirmed today with no change to the forecast.
Outlook: Four sessions of consolidation between 1.3844 and 1.3881 have built a tight coil sitting directly on the 200 day moving average, and the trigger is scheduled rather than technical. An agreement or a deadline extension opens the path toward 1.3700 with nothing meaningful in between. Tariffs taking effect argues for a retest of 1.3900 and then 1.3941. Given how little premium is currently priced, the move on either outcome is likely to be larger than the last four sessions of range would suggest.

Week Ahead:

Wednesday carries both of the week's binary events. The tariff deadline lands just after midnight Eastern and the FOMC minutes follow at 11:00 a.m. Pacific, so the Canadian dollar faces a trade policy risk and a US rates risk inside 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:

• Brent at US$91 and WTI near US$84 are the highest in more than two weeks, per Yahoo Finance. Energy is now a support for the Canadian dollar rather than the drag it was in early August.
• Japanese long dated yields are part of the same global move, with the 30 year at 4.14% per CIBC, the highest since the mid 1990s. A repricing of that size in the world's largest source of exported savings is a global rates event rather than a domestic Japanese one.
• Equity weakness is concentrated in technology. The Nasdaq is down more than 1% while the Dow is off 0.21%, per Yahoo Finance, which is the signature of a discount rate move rather than a growth scare.