USD/CAD Market Update

Current Level: Upper-1.38s (24hr range 1.3876 to 1.3908)

USD/CAD is trading near 1.3877, down 28 pips from Friday's close of 1.3905, inside a 1.3876 to 1.3908 range. The pair is lower despite a sharp hawkish repricing of the Federal Reserve. Chair Kevin Warsh's Jackson Hole keynote on Friday moved September hike odds from roughly one in three to roughly two in three, and the US 10 year yield has risen to 4.75%, per CIBC. The offset is energy. WTI has retaken US$85 per barrel after American and Iranian forces exchanged strikes over the weekend, per CIBC, and that is enough to fade the pair from the top of its range rather than break it higher.

Market Overview:

Risk appetite is cautious. CIBC reports investors weighing renewed Middle East tensions, higher oil prices and increased odds of a September Fed hike. Equity markets are modestly lower as firmer crude offsets the AI optimism that carried through last week's Nvidia results, per CIBC. Global bond yields are higher, with the US 10 year at 4.75%, and CIBC flags the 4.75% to 5.00% area as a zone that has historically coincided with episodes of market stress. The US dollar is mixed against the G10 basket rather than broadly stronger, with the Japanese yen back near levels that have previously drawn intervention, per CIBC. That mixed dollar is the reason a two thirds hike probability is not translating into a higher USD/CAD this morning.

Warsh Resets September:

Chair Warsh used his first Jackson Hole keynote on Friday to reinforce the Fed's commitment to a 2% inflation target and to describe July PCE inflation at 3.7% year over year as concerning, per the Federal Reserve and CNBC. He characterised the labour market as broadly consistent with full employment and argued that limited growth in labour supply is holding monthly job gains down on its own, per CNBC. He also declined to signal a decision, saying he was committed to a discipline rather than to an outcome. CIBC reads the speech as reinforcing the hawkish and higher for longer narratives. The pricing response was large. Implied pricing of the September 16 decision moved to 16 basis points, or roughly 65% odds of a hike, from 9 basis points and 36% odds before the speech, per CIBC. Friday's note framed the keynote as the week's asymmetric risk, with hike odds near one in three and no cut priced at any horizon. That asymmetry has now resolved in the hawkish direction, and the labour data decides whether the pricing holds.

Oil Retakes US$85:

Energy markets are higher after the United States and Iran exchanged strikes over the weekend, per CIBC. The escalation included reported attacks near the Strait of Hormuz, renewed concern about shipping disruption and reports of a vessel seizure near Bandar Abbas, per CIBC. CNBC reports Brent climbed back above US$90 per barrel after US forces targeted Iranian rocket launchers that were preparing to deploy mines into the strait. WTI has retaken US$85, per CIBC. This reverses the drag that ran through the second half of August. Last Thursday's note had WTI near US$80.90 and falling as talks between Iran and Oman on reopening the strait made progress. Roughly US$5 per barrel back on the board is a direct support for the Canadian dollar. CIBC now describes oil as the most important macro variable of the week, because elevated crude complicates the inflation outlook at the same moment the market is pricing renewed Fed tightening.

Canadian Data/Outlook:

There is no Canadian data today. The Bank of Canada decides Wednesday, September 2 at 9:45am ET with the overnight rate at 2.25%, followed by the press conference at 10:30am ET. CIBC's central bank monitor shows a 12% probability of a 25 basis point hike and a 0% probability of a cut, up from 11% on Friday, so the meeting stays priced for a sixth consecutive hold. CIBC expects the decision to be a non-event and sees policymakers waiting for greater clarity on the US and Canada trade backdrop. Friday's August employment report is the larger event, with consensus at 15.8K following July's 75.1K gain and the unemployment rate expected to hold at 6.4%. CIBC notes the latest round of US tariffs came after the survey period, so this report will not capture the recent deterioration in the trade relationship. Ottawa's matching duties on roughly C$27.6 billion of US goods still take effect September 8, which keeps the trade file live into next week whatever Friday's print delivers.

Fed Watch:

CIBC's central bank monitor shows a 65% probability of a 25 basis point hike at the September 16 FOMC and a 0% probability of a cut, up from 36% before Friday's speech. CME FedWatch sits close to that, moving to near 60% from 35% the previous day, per CNBC. Venues cluster between 57% and 65%, so the September meeting has gone from a clear hold to a genuine two way decision in a single session. Friday's non-farm payrolls report is the deciding input, with consensus at 58K after July's 23K contraction and the unemployment rate expected to hold at 4.1%. CIBC's economists expect a modest rebound in hiring and see average hourly earnings slowing to 2.9% year over year, and they frame payrolls as the test of whether the labour market is strong enough to support the hawkish view. Given Warsh's argument that weak labour supply is depressing the headline on its own, the unemployment rate is the line to watch rather than the payrolls number.

Technical Picture:

Resistance: 1.3908, today's high, then 1.3912, the cap that has held for three consecutive sessions since August 28. A clean break opens CIBC's near term target at 1.3950.
Support: 1.3876, today's low, then 1.3844, the August 28 low and the base of the current band.
Outlook: The pair has spent four sessions inside a 1.3844 to 1.3912 band, and today's move is a fade from the top of it rather than a break. CIBC's strategists continue to warn of near term Canadian dollar underperformance and target 1.3950, citing upside risk to US payrolls, trade uncertainty and USD/CAD trading below model fair value. Their longer term view is unchanged, with the pair returning to 1.3700 by year end. With three top tier events between Wednesday and Friday, the band is more likely to break than to hold through the week.

Week Ahead:

Wednesday and Friday carry the risk. The Bank of Canada is expected to be a non-event, so the Canadian dollar's exposure sits in the tone of the statement and the press conference rather than in the rate. Friday is the week's pivot, with Canadian and US employment landing in the same minute at 8:30am ET, and the US number now carrying direct consequences for a September FOMC decision that is close to a coin flip. The September 16 FOMC itself falls outside this window and is the destination for everything priced this week.

Other Notes:

• WTI is back above US$85 and Brent above US$90, per CIBC and CNBC, roughly US$5 per barrel above last Thursday's level. That restores a support for the Canadian dollar which had eroded through most of August.
• The US 10 year yield is near three year highs at 4.75%, per CIBC, which reads the 4.75% to 5.00% band as the historical stress zone for long end yields. A strong payrolls print on Friday would push it further into that band.
• USD/JPY is back near levels that have historically preceded Japanese intervention, per CIBC, which notes that each successive intervention has had a shorter lived effect.