USD/CAD Market Update

Current Level: Upper-1.38s (24hr range 1.3845 to 1.3893)

USD/CAD is trading near 1.3891, up 38 pips from Monday's close of 1.3853, inside a 1.3845 to 1.3893 range. The driver has rotated from oil to bonds. Yields in the US, Canada, Japan, the UK and Europe are at multi-decade highs, per CIBC, and the resulting risk-off tone has the US dollar stronger against the G10 basket. Monday's pattern, where firmer crude faded the pair from the top of its range, has given way to a session where the bond selloff is doing the pushing and USD/CAD is back within about 20 pips of the 1.3912 cap that has held since August 28.

Market Overview:

Risk appetite is under pressure. CIBC reports higher bond yields, rising oil prices and growing expectations of a September Fed hike all weighing on sentiment. Equity markets are lower as higher yields squeeze valuations, although the major indices remain near all time highs, per CIBC. The US dollar is stronger against the G10 basket, a firmer tone than Monday's mixed session, with attention fixed on the Japanese yen as USD/JPY pushes back above 160, a level that has previously prompted official intervention, per CIBC. The one soft data point of the morning cut against the hawkish story: ISM manufacturing printed 54.6 against 55.2 expected and 55.6 prior, and the market barely reacted.

Bond Markets Set the Tone:

The global bond selloff has become the session's organizing story. Japan's 10 year yield touched 3% for the first time since 1996, per Bloomberg and Reuters, with the move driven by inflation concerns, fiscal worries and mounting pressure on the Bank of Japan to keep tightening. Yields in the US, Canada, the UK and Europe are also at multi-decade highs, per CIBC, as investors price a more aggressive central bank path following Chair Warsh's hawkish Jackson Hole remarks and as elevated oil feeds the inflation outlook. CIBC's core read is that investors could ignore the bond market for years and no longer can; if yields keep rising, they become the story for every other asset class. The bank flags Japan as the pressure point. In CIBC's framing the Bank of Japan faces a bind: holding rates steady could force it to sell Treasuries to defend the currency, while hiking risks unwinding the yen carry trade, and either path is disruptive.

Hormuz Escalation Keeps Oil Bid:

Two supertankers were struck by projectiles late Monday while transiting out of the Strait of Hormuz, per Bloomberg: the Sidr, run by Saudi Arabia's Bahri shipping group, and the Senegal Prosperity, operated by South Korea's Sinokor. The strikes undercut hopes that talks on reopening the strait would hold, and WTI has climbed above US$88 per barrel, per CIBC, roughly US$3 above Monday's level and about US$7 above where it sat last Thursday. For USD/CAD the effect is now two sided. Firmer crude remains a support for the Canadian dollar, but CIBC notes rising oil is also feeding the inflation concern that keeps central banks restrictive, and today the inflation channel is winning.

Canadian Data/Outlook:

There is no Canadian data today. The Bank of Canada decides tomorrow, 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 10% probability of a 25 basis point hike and a 0% probability of a cut, down from 12% on Monday, and surveyed economists unanimously expect a hold, per MoneySense. The rate has been unchanged since October 2025. With the decision itself fully priced, the market's exposure sits in the tone of the statement and the press conference, and specifically in how policymakers weigh an economy that has been beating forecasts against the trade uncertainty that returned with mid-August's breakdown in tariff talks. Friday's August employment report follows, with consensus at 15.1K after July's 75.1K gain and the unemployment rate expected to hold at 6.4%. Ottawa's matching duties on roughly C$27.6 billion of US goods still take effect September 8.

Fed Watch:

CIBC's central bank monitor shows a 67% probability of a 25 basis point hike at the September 16 FOMC and a 0% probability of a cut, up from 65% on Monday. CME FedWatch sits at 66%, per Forbes. CIBC also notes markets are pricing 38 basis points of tightening by December, roughly a hike and a half, so the debate has moved past whether the Fed hikes to how far it goes. Friday's non-farm payrolls report is the deciding input, with consensus at 55K after July's 23K contraction, the unemployment rate expected to hold at 4.1% and average hourly earnings seen up 0.3% on the month. Given Warsh's argument that weak labour supply is depressing the headline number on its own, the unemployment rate remains the line to watch rather than the payrolls print. This morning's soft ISM manufacturing reading is the first data wobble against the hawkish pricing, and it was not enough to move it.

Technical Picture:

Resistance: 1.3893, today's high, then 1.3912, the cap that has held for five consecutive sessions since August 28. A clean break opens CIBC's end of week target at 1.3950.
Support: 1.3845, today's low, then 1.3844, the August 28 low that forms the base of the band.
Outlook: The pair is in its fifth session inside the 1.3844 to 1.3914 band and is testing the top of it from below. CIBC's strategists continue to warn of near term Canadian dollar underperformance and target 1.3950 by the end of the week, citing upside risk to US payrolls, trade uncertainty and USD/CAD trading below model fair value near 1.4050. Their longer term view is unchanged, with the pair returning to 1.3700 by year end. With the Bank of Canada tomorrow and twin employment reports Friday, the band remains more likely to break than to hold through the week, and today's close near the highs says the pressure is to the upside.

Week Ahead:

Tomorrow's Bank of Canada decision is the nearest event but the least likely to surprise on the rate itself; the statement language on trade is where the Canadian dollar's risk sits. Friday remains the week's pivot, with Canadian and US employment landing in the same minute at 8:30am ET and the US print feeding directly into a September 16 FOMC decision that markets now price at two in three odds of a hike.

Other Notes:

• WTI is above US$88 per barrel, per CIBC, a third straight day of gains and roughly US$3 above Monday, after the reported strikes on two supertankers in the Strait of Hormuz.
• USD/JPY is back above 160, per CIBC, a level that has previously prompted Japanese intervention, and the pressure on the Bank of Japan is compounding the global bond selloff.
• The Reserve Bank of New Zealand decides tonight at 10:00pm ET, with the calendar consensus at a 25 basis point hike to 2.75%, another marker of the global turn toward tightening.