USD/CAD Market Update

Current Level: Low-1.38s (24hr range 1.3830 to 1.3867)

USD/CAD is trading near 1.3834, down 7 pips from Monday's close of 1.3841, inside a 1.3830 to 1.3867 range. That is a 37 pip session against Monday's 68 pip gap higher, and it follows a further escalation in the trade file rather than a pause in it. CIBC reports the pair holding in the low 1.38s as markets continue to price the fallout from the failed negotiations and the tariffs that took effect Saturday. The move that matters today is the one that did not happen.

Market Overview:

Risk appetite is improving. CIBC reports equities higher with the Nasdaq leading as chip stocks rebound ahead of Nvidia's earnings tomorrow, and investors looking through to a busy week of earnings and the Jackson Hole symposium. Global yields are mostly lower, with the US 10 year down roughly 3 basis points as markets position for Fed Chair Kevin Warsh's first Jackson Hole address on Friday, per CIBC. The US dollar is mixed against the G10 basket. Our data has EUR/USD at 1.1672 against Monday's close of 1.1668 and GBP/USD at 1.3645 against 1.3638, so the dollar is broadly unchanged rather than bid. That matters for reading the Canadian dollar today. There is no dollar rally to hide behind, and the Canadian dollar is still holding after a fresh escalation, which is the opposite of Monday's reaction function.

Trade War Moves to Autos:

President Trump said the United States will raise tariffs on all Canadian cars, trucks, automotive parts and steel to 50% effective January 1, 2027, per CNBC, Al Jazeera and NBC News. Duties on Canadian vehicles currently stand at 25% and are diluted further by American content, while steel is already at 50%, so the incremental change is concentrated in autos and in a new line for parts. Ontario Premier Doug Ford responded by threatening to cut American access to electricity and to restrict critical mineral exports. Trump answered on social media that much of the electricity, oil and gas Canada relies on is transported through the United States. Prime Minister Carney said Monday that Canada may need more targeted retaliation to protect workers and businesses, per NBC News. The measures Ottawa has already announced remain the dated item. Canada's dollar for dollar response takes effect September 8 and targets steel, dairy, appliances, agricultural equipment, pulp and paper and electronics, per Al Jazeera and The Hill. The important distinction for hedgers is timing. Saturday's tariffs are in force now, Ottawa's response lands in two weeks, and the auto threat is more than four months out. Markets have priced the first, are watching the second, and are discounting the third.

CIBC Scenario Ladder:

CIBC's FICC strategy team published three paths this morning with explicit probabilities and levels. Escalation into a tit for tat trade war carries a 35% weight and takes USD/CAD to 1.4100, which the team describes as the upper end of a stressed scenario. CIBC notes that further retaliation is a meaningful risk after US officials signalled they will not tolerate Canadian countermeasures, but does not expect a repeat of the February 2025 panic move because the tariffs are narrower and better understood. The base case carries a 60% weight at 1.3700 and assumes no further escalation, with focus returning to Jackson Hole, US data and the September FOMC. A quick resolution carries a 5% weight at 1.3500. CIBC Economics estimates the current tariff package costs roughly 1% of Canadian GDP this year. The team's framing is that trade volatility is the noise and US macro is the signal, and its bias remains toward a lower USD/CAD over time even if headlines push it higher first. That is a 60% weighted call for 134 pips of Canadian dollar strength against a 35% weighted call for 266 pips of weakness, which is close to a balanced expected value at current spot and is consistent with a pair that will not break out.

Canadian Data/Outlook:

There is no Canadian data today. June GDP lands Friday with consensus at 0.2% on the month against 0.3% prior, and it will be the first reading that begins to capture the pre-tariff momentum the Bank of Canada is working from. The Bank meets September 2 with the overnight rate at 2.25%. CIBC's central bank monitor shows the market pricing a 1% probability of a 25 basis point hike and a 0% probability of a cut, so the meeting is effectively fully priced for no change. That pricing is worth flagging because it has not moved despite the tariff escalation. Investors have marked down Canadian growth prospects without pulling forward any easing, which leaves the September 4 employment report as the more likely trigger for a repricing than the decision itself.

Fed Watch:

CIBC's central bank monitor shows a 39% probability of a 25 basis point hike at the September 16 FOMC and a 0% probability of a cut. CME FedWatch data as of August 20 implied roughly 31% for a hike, and Kalshi has been trading near 35%, so today's CIBC number sits at the upper end of a range that has been drifting higher. The direction of that drift is the point. The market is not debating whether the Fed cuts this year, it is debating whether the Fed hikes, and the drivers are elevated energy costs tied to the Iran conflict and doubt about the Fed's tolerance for inflation after the July hold. Two events shape it this week. Core PCE for July is released Wednesday with consensus at 0.2% on the month against 0.1% prior, and Warsh delivers his first Jackson Hole address as Chair on Friday morning. Warsh has committed to returning inflation to the 2% target while offering little detail on his outlook, and nearly half of policymakers indicated at the June meeting that they would support a hike later this year. A hawkish debut would be the cleanest route to a stronger US dollar this week, and it would come from the US side of the pair rather than the Canadian side.

Technical Picture:

Resistance: 1.3867 is today's high and the first level. Above that, 1.3910 is Monday's failure point and the top of the August 19 range, and a close through it would put CIBC's 1.4100 escalation scenario back in scope.
Support: 1.3830 is today's low and is holding as the floor of a tight session. Below it, 1.3783 is Monday's low and the base of the post-tariff gap, and 1.3731 remains the three month low set August 21.
Outlook: The pair has spent three sessions inside Monday's 1.3783 to 1.3851 range and has not extended on a genuine escalation headline, which argues the tariff premium is now installed rather than accumulating. Most of the move up from 1.3731 sits above spot, so the risk skews toward a fill back into the 1.3780s if the file stays quiet into September 8. The 1.3830 low is the level to watch for that. A break of 1.3910 changes the read.

Week Ahead:

Friday is the dense day. Canadian GDP and Warsh's Jackson Hole debut land within 90 minutes of each other, and they push the pair in opposite directions if both surprise. The following week is heavier still, with the Bank of Canada on September 2, both employment reports on September 4, and Ottawa's retaliation on September 8. Hedgers with September exposure should note that the calendar concentrates the risk into a five day window rather than spreading it.

Other Notes:

• WTI has fallen to a one week low near US$85 per barrel. The US Treasury sanctioned dozens of individuals, entities and vessels linked to Iranian trade networks, including Chinese and Hong Kong entities, but stopped short of major Chinese financial institutions, per CIBC and CNBC. WTI fell 2.5% to US$84.89 on Monday and Brent fell 2.5% to US$92.06. CIBC's read is that the sanctions took headlines but not barrels, and that crude will struggle to hold a geopolitical premium without a visible threat to supply. Softer crude is a mild negative for the Canadian dollar and has offset part of today's improvement in risk appetite.
• Nvidia reports tomorrow. CIBC notes that realized earnings volatility for the name has historically run well below implied, but the print is the largest single cross asset risk event before Jackson Hole and a sharp equity reaction would carry into the Canadian dollar through risk sentiment rather than through anything domestic.