USD/CAD Market Update

Current Level: Upper-1.37s (24hr range 1.3756 to 1.3813)

USD/CAD is trading near 1.3771, down 38 pips from Wednesday's close of 1.3809, inside a 1.3756 to 1.3813 range. Today's low is the weakest level for the pair since May 21, which makes this a three month low, and it arrives with the DXY at a three month low of its own. CIBC reports the pair in the upper 1.37s on continued broad based US dollar weakness, in a quieter session where markets are still digesting Wednesday's Treasury buyback announcement and confirmation that US public debt has passed US$40 trillion. The move extends Wednesday's break of the 200 day moving average at 1.3848 and leaves CIBC's 1.3700 year end target within reach.

Market Overview:

Risk appetite is mixed. CIBC reports investors weighing surging US debt, signs of a slowing US consumer, and expectations that policymakers will step in to contain bond yields. The bond relief did not last. Global yields are higher again and the US 30 year is back at 5.26%, per CIBC, erasing a good part of Wednesday's rally, which had taken the long bond as low as 5.18% after the buyback announcement, per NBC News. Equities are modestly lower as higher yields and firmer oil weigh on sentiment. Walmart is down around 9%, its largest one day move since 2022, after reporting its slowest quarter for US sales in six years and warning that consumers are becoming more selective with discretionary spending, per CIBC. Crude is extending its rally, with WTI above US$87 per barrel on renewed concern about Middle East supply, per CIBC. The US data this morning was firm. Initial jobless claims fell to 206,000 against 210,000 expected and the Philadelphia Fed index jumped to 47.4 against 25.0 expected, per Investing Live, and neither print has given the US dollar any lift. That is the tell for today. Strong US data is not buying dollars while the market is focused on how the deficit gets funded.

US Debt Passes US$40 Trillion and the Dollar Absorbs It:

The Treasury confirmed that outstanding public debt has reached US$40 trillion for the first time, in the same announcement that at least doubled the size of its liquidity support buybacks in the 10 to 30 year sector from September 9 through early November, per Reuters and CNBC. CIBC frames the reason plainly. Interest costs have reached US$1.17 trillion year to date, now the third largest line in federal spending and larger than the defence budget, and the long end buybacks followed 10 year and 30 year auctions that cleared at the highest yields in decades. CIBC's take is that the real risk is markets starting to question whether the US can fund its deficits without intervention or yield curve control, and that confidence problems can accelerate faster than policymakers expect, while adding that the market is not there yet. The bond market's reply has been quick. The 30 year yield has given back much of Wednesday's drop within a day, and CIBC reads that as a message that buybacks buy time but do not solve the underlying debt problem. The currency market is carrying the adjustment instead. The DXY is at a three month low after this week's selloff, and CIBC notes that its strategists' year end targets have already been reached in EUR/USD at 1.17 and surpassed in GBP/USD at 1.35. CIBC's strategy team remains bearish on the US dollar on both tactical and fundamental grounds, and points out that the DXY failed to break overhead resistance around 101 to 102. For USD/CAD the read through is direct. CIBC maintains a 1.3700 year end target, says the risks are increasingly skewed toward reaching it much sooner than expected, and says its strategists will consider lowering the target next week.

Tariff Pause Runs Out Friday:

The three day pause on the additional 50% Section 338 duties runs through the end of the day on Friday, August 21. President Trump described the pending agreement as very good for both countries after announcing the pause, per BNN Bloomberg, and Prime Minister Carney said substantial progress has been made while important work remains, per CP24. Published estimates of the exposure range from US$20 billion to US$28 billion of Canadian exports, with autos, dairy and provincial alcohol restrictions the items Washington has named. The terms under discussion remain broad, with the US lowering tariffs on Canadian autos, steel, aluminum and forest products in exchange for Canada dropping retaliatory tariffs, provinces ending bans on US alcohol, and Ottawa accepting the US reading of supply managed dairy licences, per The Globe and Mail. Today's CIBC note does not cover the file, so the framing here comes from public reporting. What has changed since Wednesday is positioning. The pair has now fallen 126 pips from Tuesday's close and is sitting at a three month low, which means a good outcome is partly in the price while a breakdown on Friday is not. The clock reopens the same binary as Wednesday's deadline with one day of room left, and the asymmetry for hedgers has shifted toward protecting against a failed deal rather than chasing a successful one.

Canadian Data/Outlook:

The Industrial Product Price Index rose 0.6% on the month in July against a Bloomberg survey expectation of a 0.5% decline, after a 1.4% drop in June, per MarketScreener. It is a second tier release, but it follows the 3.0% headline CPI print from Monday and points the same way on pipeline pressure. The Bank of Canada's policy rate is 2.25%, held on July 15. CIBC's Central Bank Watch puts the implied probability of a 25 basis point hike at the September 2 meeting at 5%, unchanged from Wednesday, with no cut priced. The core measures the Bank reacts to remain at target, with CPI trim at 1.9% and CPI median at 2.0%, so the domestic rate path is not what is moving the currency this week. The next release is June retail sales on Friday at 5:30 a.m. Pacific, where Statistics Canada's advance estimate points to a 0.4% gain after a 1.0% increase in May, per Bloomberg. It lands the same morning the tariff pause expires and will be the smaller of the two events. Monthly GDP follows on August 28, and the Bank of Canada decides on September 2.

Fed Watch:

The minutes of the July 28 to 29 meeting, released Wednesday, confirmed the most divided vote in years. The committee held at 3.50% to 3.75% by 9 to 3, with Cleveland's Hammack, Minneapolis's Kashkari and Dallas's Logan each preferring a 25 basis point hike, and the minutes recorded participants saying policy tightening would likely be necessary if inflation did not decline, per the ABA Banking Journal and Quartz. The hawkish case extended well beyond the three dissenters. The minutes also recorded a discussion, raised by Chair Warsh, about reducing the number of FOMC meetings from eight to six per year. Pricing has not moved much on the release. CME FedWatch shows roughly a 68% probability that the target range stays at 3.50% to 3.75% on September 16, with the balance priced for a 25 basis point hike and no cut priced. CIBC's Central Bank Watch is consistent at 35% for a hike and 0% for a cut, unchanged from Wednesday. The combination on the table is a Fed that is closer to hiking than cutting and a dollar that is falling anyway, which is the clearest sign that this week's US dollar move is a fiscal story rather than a rates story. Jackson Hole runs August 27 to 29, and Warsh delivers the keynote on Friday, August 28, his first as Chair. Under Warsh the Fed has stopped signalling ahead of meetings, so the speech carries more information than usual and lands 19 days before the September decision.

Technical Picture:

Resistance: 1.3813, today's high and the session's opening area. Above that, 1.3848, the 200 day moving average that contained the pair for four sessions and broke on Wednesday, then 1.3897, Tuesday's close, and the 1.3900 figure that broke last week.
Support: 1.3756, today's low. Below that, 1.3737, the May 21 low and the last level before the late May range, then 1.3700, CIBC's year end target and a round figure the market will watch closely.
Outlook: The trend is lower and the pair has now broken the 200 day average, the 1.3800 figure and the early June lows in two sessions. Momentum favours a test of 1.3700 while the US dollar stays under pressure, but the pair has fallen 160 pips in a week without a meaningful bounce and Friday's tariff outcome is a live reversal risk. A failed deal would target 1.3848 quickly. A completed deal with the pair already at these levels may produce less follow through than the headlines suggest.

Week Ahead:

Friday is the near term event. The tariff pause and June retail sales land within hours of each other, and the tariff outcome is the one that can move the pair by a full figure. The following week shifts the focus back to the US side, with the second GDP estimate and core PCE on Wednesday, then Warsh's first Jackson Hole address on Friday alongside Canadian GDP and the payrolls benchmark revision, which last year removed 911,000 jobs from the prior count. The Bank of Canada decision on September 2 is priced as a hold.

Other Notes:

• WTI crude is above US$87 per barrel on renewed Middle East supply concerns, per CIBC, a fourth day of gains that continues to support the Canadian dollar through the broader risk wobble.
• CIBC's strategists' year end targets of 1.17 in EUR/USD and 1.35 in GBP/USD have already been reached or surpassed, and the team remains bearish on the US dollar on both tactical and fundamental grounds.
• Walmart's 9% drop after its weakest US sales quarter in six years is the first hard signal from a consumer bellwether that households are pushing back on prices, per CIBC, which adds to the soft July retail sales and housing starts already in the picture.