USD/CAD Market Update

Current Level: Upper-1.38s (24hr range 1.3836 to 1.3878)

USD/CAD is trading near 1.3877, up 40 pips from Tuesday's close of 1.3837, inside a 1.3836 to 1.3878 range. The pair cleared yesterday's 1.3869 high and is holding at the top of the session, its strongest level since August 19. Yesterday's note argued that the tariff premium was installed rather than accumulating, and that the risk skewed toward a fill back into the 1.3780s if the trade file stayed quiet. It did not stay quiet. Two forces pushed the same way today, with July core PCE confirming that US inflation is not cooling and Ottawa putting a full matching retaliation package on the table.

Market Overview:

Risk appetite is flat. CIBC reports equities mostly unchanged as investors wait for Nvidia's results after the close and Chair Warsh's Jackson Hole speech on Friday. Global bond yields are 1 to 3 basis points higher as markets digest the inflation release, per CIBC, and the US dollar is modestly stronger against the G10 basket. Energy is the offset. WTI has fallen back toward US$80 per barrel after Iran and Oman resumed talks on a temporary shipping corridor through the Strait of Hormuz, per CIBC and CNBC, which removes a support the Canadian dollar leaned on through most of August. A firmer dollar, softer crude and an escalating trade file all point the same direction for USD/CAD today. That is why a 42 pip session produced a clean break rather than another failed test of the highs.

Ottawa's Retaliation Lands:

Canada announced retaliatory tariffs on roughly C$27.6 billion of US goods on Tuesday, matching Washington's Section 338 measures dollar for dollar, per CIBC and the Associated Press. The duties take effect September 8 and are set at 15%, 25% and 50% across roughly 700 product lines. The 50% band covers steel, aluminum, furniture and clothing. The 25% band covers cheese, appliances and some seafood. The 15% band covers electronics and tools. Ottawa paired the measures with a C$7.5 billion package of support for small and medium sized businesses, company cash flow and workers exposed to the duties. CIBC reports the US administration is considering additional measures in response. Monday's note flagged the composition of Ottawa's list as the live question for the pair. It is now answered, and the answer is a full match rather than a measured subset. CIBC's strategists read the escalation as negative for the Canadian dollar in the near term and see USD/CAD grinding back toward the 1.40 area, while holding a 1.37 target for year end.

US Inflation Progress Stalls:

July personal income and outlays landed this morning. Core PCE rose 0.2% on the month and 3.3% year over year, matching consensus, per CIBC and CNBC. Headline PCE ran at 3.7% year over year, roughly a tenth above the consensus estimate, per CNBC. Both readings sit well above the Fed's 2% target and neither shows renewed disinflation. The activity side was softer than the price side. Personal income rose 0.4% and nominal spending rose 0.2%, while real consumer spending was flat on the month and the personal saving rate climbed to 3.0%, per CIBC and CNBC. That is a consumer directing a larger share of income to savings and a smaller share to discretionary purchases. CIBC's read is that nothing in the report changes its Fed outlook, with activity firm enough to keep policymakers on hold. The market response was small but directional, with yields 1 to 3 basis points higher and the dollar firmer. A report that fails to deliver disinflation leaves the September hike debate open into Friday, and that is the part that matters for this pair.

Canadian Data/Outlook:

There is no Canadian data today. June GDP by industry lands Friday with consensus at 0.2% on the month against 0.3% prior. That reading still predates the US tariffs that took effect August 22, so it measures the starting point rather than the damage. The Bank of Canada decides September 2 with the overnight rate at 2.25%. CIBC's central bank monitor shows a 1% probability of a 25 basis point hike and a 0% probability of a cut, so the meeting is fully priced for a sixth consecutive hold. That pricing has not moved through a week that included failed negotiations, US duties taking effect and now Ottawa's matching response. Investors are marking down Canadian growth without pulling forward any easing. The tension in that position is the thing to watch. If the September 2 communications acknowledge the tariff drag and lean dovish, there is no easing already priced to cushion the Canadian dollar, so the repricing would have to happen after the decision rather than before it.

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 has been running near 40% for a hike as of August 25, with futures closer to one chance in three and prediction markets somewhat higher, per Babypips and FXStreet. The spread between those venues is itself the signal. September is genuinely unsettled, and no cut is priced at any horizon relevant to this report. Chair Warsh delivers his first Jackson Hole keynote on Friday morning, nineteen days before the decision. He has curtailed forward guidance since taking office in May, which raises the information value of any substantive remark and widens the distribution of outcomes around twenty minutes of prepared text. A hawkish debut following a core PCE print that failed to cool would be the cleanest route to a stronger US dollar this week. It would compound the trade driven move in USD/CAD rather than offset it.

Technical Picture:

Resistance: 1.3878 is today's high and the first level. The pair has cleared yesterday's 1.3869 high and the August 24 high at 1.3851, and CIBC notes it has reclaimed its 200 day moving average. Above here, 1.3908 is the August 19 high and the last swing top, and a close through it opens CIBC's 1.40 area.
Support: 1.3836 is today's low and the floor of the break. Below that, 1.3783 is the August 24 low and the base of the post tariff gap, and 1.3731 is the three month low set August 21.
Outlook: The pair has retraced roughly 82% of the 1.3908 to 1.3731 decline and sits 146 pips above the August 21 low. Three sessions of failed tests in the 1.3851 to 1.3869 band resolved higher rather than lower, which reverses yesterday's read. The fill back into the 1.3780s is off the table while 1.3836 holds. With September 8 now fixed as the retaliation date and Warsh on Friday, the calendar supplies catalysts in both directions, but the burden of proof has shifted to the Canadian dollar. Exporters selling US dollars have 146 pips of improvement since August 21 and should be scaling into that rather than waiting for 1.40 to print. Importers buying US dollars are paying up and no longer have a quiet trade file to wait out.

Week Ahead:

Friday is the pressure point again. Canadian GDP and Warsh's keynote land within 90 minutes of each other and push the pair in opposite directions if both surprise. The following week carries the Bank of Canada on September 2, both employment reports on September 4 and Ottawa's duties on September 8. That is four binary events inside seven days. Hedgers with September value dates should treat the window from September 2 to September 8 as a single concentrated risk rather than a series of separate ones.

Other Notes:

• WTI is trading near US$80.50 per barrel, down roughly 2.2% on the day, after Iran and Oman resumed talks on a joint temporary shipping corridor through the Strait of Hormuz, per CIBC and CNBC. Oman's foreign minister described the corridor as a precursor to a permanent arrangement for the waterway. Crude is down more than US$4 from Monday's level, and traders largely looked through new US sanctions on Tehran. The geopolitical premium in crude is draining faster than the trade premium in USD/CAD is building, which costs the Canadian dollar a support it has had all month.
• Nvidia reports after the close today. Consensus is for roughly US$92 billion in revenue and US$2.09 in earnings per share, with forward guidance mattering more than the quarter itself, per CIBC. It is the largest single cross asset risk event before Friday's keynote, and it reaches USD/CAD through risk sentiment rather than through anything domestic.