USD/CAD Market Update

Current Level: Mid-1.38s (24hr range 1.3783 to 1.3851)

USD/CAD is trading near 1.3830, up 37 pips from Sunday's close of 1.3793, inside a 1.3783 to 1.3851 range. The pair gapped roughly 40 pips higher at the Asian open after US and Canada trade negotiations collapsed late Friday and the 50% tariffs on roughly $20bn of Canadian goods took effect at midnight, per Al Jazeera and the Washington Post. Friday's note argued that a completed deal was partly in the price while a failure was not. That asymmetry has now paid out, and Friday's three month low at 1.3731 stands as the floor of the move.

Market Overview:

Risk appetite is mixed. TheStreet reports stocks trading unevenly as investors weigh new US sanctions on Iran, the failed Canada talks and reciprocal tariff threats, Nvidia's earnings this week, and the start of the Jackson Hole symposium. The US dollar is attempting to stabilize after a heavy week. The dollar index sits near 98.8, just above the three month low near 98.50 set Thursday, its weakest since May 14, per FXStreet, and the index fell more than 0.8% last week. Treasury yields have not settled. The ten year closed Friday at 4.734% and the thirty year at 5.273%, both higher on the day despite the Treasury's expanded buyback, per CNBC. Our data shows EUR/USD easing to 1.1670 today after printing 1.1712 on Friday, so today's dollar recovery is broad rather than Canada specific. The Canadian dollar is underperforming within that recovery.

US Canada Trade Rupture:

Negotiations broke down late Friday after three days of talks in Washington, and the 50% duties on roughly $20bn of Canadian goods took effect at midnight, per Al Jazeera. Prime Minister Carney called the tariffs a miscalculation and said the US side asked too much and offered too little, per NBC News. He confirmed Canada will match the levies dollar for dollar, with retaliatory duties taking effect September 8 and targeting steel, dairy, agricultural equipment, and pulp and paper, per CNBC. Carney chaired a First Ministers Meeting on Saturday, and the government has said further support for affected workers and businesses will follow in the coming days, building on roughly $25bn provided over the past 18 months, per the Prime Minister's Office. The framework for a settlement still exists. Canada had signalled it would drop its remaining retaliation on steel, aluminum and autos if Washington lowered its own, per NBC News. The next leg depends on the scale of Ottawa's September 8 list and whether the two sides re-engage before it lands. A measured list plus visible contact between the leaders would argue for range trading. Evidence that both sides are entrenched would put July's levels back in scope.

Dollar Under Fiscal Pressure:

The Canada story is running against a weaker dollar backdrop, which is part of why the move has been contained. The Treasury announced on August 19 that it would at least double its long end buyback operations from $2bn to at least $4bn, targeting the 10 to 30 year sector, and Secretary Bessent has since said individual operations could run larger, per CNBC. The dollar fell close to 0.8% on the announcement day and reached a three month low by Thursday, per CNBC and FXStreet. The intent is to cap long end borrowing costs, and Bessent has said current yields do not reflect fundamentals and that 30 year liquidity is weak. So far the market has not agreed. Long end yields rose again on Friday. For hedgers the read is that the dollar has a structural bid problem that the tariff headline has interrupted, not reversed.

Canadian Data/Outlook:

The macro damage is concentrated rather than broad. Trevor Tombe of the University of Calgary estimates roughly 87,000 Canadian jobs are at risk, about 52,000 directly exposed to the tariffed goods and a further 35,000 at suppliers and service providers, with agriculture, textiles, electronics, furniture and plastics manufacturing most exposed, per CBC News and BNN Bloomberg. Statistics Canada releases June GDP by industry on Friday alongside second quarter GDP, and its advance estimate points to a 0.2% monthly gain, matching the consensus on our calendar. The Bank of Canada decides on September 2 and has held at 2.25% for six consecutive meetings. Markets price roughly a 99% chance of another hold with about a 1% chance of a hike, and do not price a cut until later in the autumn, at roughly 27% by the October 28 decision, per LSEG data. The July Monetary Policy Report assumed an average tariff rate on Canadian goods of 5.1%, so the new duties push the Bank's own working assumption the wrong way, and the Bank has warned that tariffs risk structural damage to the economy, per RBC Economics. With growth still below potential, the Bank is more likely to read the duties as a growth risk than a price risk. That reading narrows the rate differential argument for the Canadian dollar at the margin.

Fed Watch:

Fed Chair Kevin Warsh delivers his first Jackson Hole keynote on Friday morning, nineteen days before the September 16 FOMC decision. The symposium runs August 27 to 29 under the theme Financial Innovation: Implications for Payments and Policy. Expectations are genuinely two sided. Warsh has curtailed forward guidance since taking office in May and the Fed no longer signals its intentions between meetings, which raises the information value of any substantive remark, per Bloomberg. Markets price roughly a 68% chance of a hold on September 16 per the CME FedWatch tool as of August 20, which leaves close to one in three odds of a hike. No cut is priced at that meeting. The inflation test comes first. Core PCE for July is released Wednesday with consensus at 0.2% month over month, and the Cleveland Fed nowcast sits near 3.3% year over year against 3.3% in June, per Oxford Economics. An in line print keeps the cooling narrative intact and gives Warsh room to stay on structural themes. A firm print, or a chair who leans against dovish readings, would widen differentials in the dollar's favour and compound the tariff move in USD/CAD.

Technical Picture:

Resistance: 1.3851 is today's high and the top of National Bank of Canada's 1.3700 to 1.3850 five day tactical range. Above there, 1.3910 is the August 19 high and the last swing top before the pair broke lower.
Support: 1.3783 is today's low and the base of the post gap consolidation. Below that, 1.3731 is Friday's three month low, which also cleared the May 21 low at 1.3737.
Outlook: The pair has retraced roughly two thirds of last week's 1.3910 to 1.3731 decline in two sessions. That is a headline driven repricing, not yet a trend change. A daily close above 1.3851 opens 1.3910 and puts the whole of last week's decline back in play. Failure to hold 1.3783 would suggest the tariff repricing is complete and hand the pair back to the dollar side, where 98.50 on the dollar index is the reference. Exporters who did not act at 1.3731 have a materially better level here and should not wait for 1.3910. Importers should treat 1.3851 as the line that separates a spike from a base.

Week Ahead:

Friday is the week's pressure point. Warsh's keynote, Canadian GDP and the US benchmark payrolls revision all land the same morning, which raises the odds of a directional break out of the 1.3783 to 1.3851 range rather than a drift. Canada's retaliatory tariffs take effect September 8, one day past this two week window, so the composition of Ottawa's list is a live headline risk throughout the period even though the implementation date sits outside it.

Other Notes:

• WTI is down 2.16% near $84.65 after testing $87.65 last week, with reports of increased tanker transits through the Strait of Hormuz repricing supply risk lower, per TradingKey. That removes a support the Canadian dollar had been leaning on. Bessent is expected to detail new US sanctions on Iran today, per TheStreet, which cuts the other way on the same channel.
• The Treasury's buyback expansion has not yet done its job. Long end yields rose again on Friday despite the operation doubling to at least $4bn, per CNBC, which is why the dollar sits near a three month low even on a day it is gaining against the Canadian dollar.
• Nvidia reports this week. It is the main equity risk event on the calendar and reaches USD/CAD through risk beta rather than through anything domestic.