USD/CAD Market Update

Current Level: Upper-1.38s (24hr range 1.3887 to 1.3940)

USD/CAD is trading near 1.3887, down 9 pips from Tuesday's close of 1.3896, after an overnight surge to 1.3940 that broke the 1.3912 to 1.3914 cap in place since August 28. The break came as the United States and Iran exchanged their largest round of attacks in more than a month and the global bond selloff extended, per Al Jazeera and CNBC. The pair has since given back the entire move, with Brent crude near US$95 doing the work for the Canadian dollar, the same pattern that faded the pair from its highs on Monday.

Market Overview:

Risk appetite is under clear pressure. The US dollar is stronger against most major counterparts as the Middle East conflict turns hotter and long term borrowing costs climb worldwide. The US 10 year Treasury yield reached 4.81%, its highest since November 2023, per CNBC, and Japan's 10 year yield is above 3% for the first time since 1996. Equity markets are trading defensively as higher yields squeeze valuations. The morning's one soft data point was ADP private payrolls at 38K against 48K expected, the slowest pace since January, per Reuters, a mildly dovish input two days ahead of Friday's official jobs report.

Largest US and Iran Exchange in a Month:

The United States struck dozens of military targets along Iran's southern coast and hit Iranian oil tankers for the first time, per Axios, in response to attempted attacks on commercial shipping in the Strait of Hormuz. Iran retaliated with coordinated missile and drone attacks on US bases in Bahrain, Kuwait, Jordan and Erbil in Iraq, per Al Jazeera, the biggest exchange between the two sides in more than a month. Brent crude is trading near US$95 per barrel, and WTI advanced toward US$91 after jumping 5.2% on Tuesday, its biggest gain in five weeks, per Bloomberg. For USD/CAD the effect remains two sided. Firmer crude supports the Canadian dollar directly, while the inflation impulse from higher energy keeps central banks tilted hawkish and the US dollar bid. This morning the crude channel is winning, which is why the overnight break above 1.3912 has not held.

Bond Selloff Reaches New Extremes:

The US 10 year yield touched 4.81%, its highest level since November 2023, per CNBC, as surging oil prices intensified inflation concerns. Long term yields hit multi-year highs in Germany, France, Japan and the United Kingdom, with investors demanding a greater premium to hold medium and long term government debt. CIBC's framing from earlier this week continues to apply: investors could ignore the bond market for years and no longer can, and if yields keep rising they become the story for every other asset class. With sovereign issuance heavy, debt levels elevated and central banks no longer suppressing yields through asset purchases, there is little in place to stop the climb in borrowing costs.

Canadian Data/Outlook:

The Bank of Canada held its overnight rate at 2.25% this morning at 9:45am ET, its seventh consecutive hold, per the Globe and Mail, a decision that was fully priced and universally expected. This was the first decision since trade talks between Ottawa and Washington collapsed in mid August, and the bank flagged the trade war as a risk to growth even as tariffs add to inflation, the same dilemma policymakers have highlighted throughout the dispute. Governor Macklem's press conference follows at 10:30am ET, and the tone there is the remaining domestic event risk today. On the path from here, most economists expect the rate to stay at 2.25% through year end, although National Bank and Scotiabank forecast a move to 2.50% in October and 2.75% before year end. Ottawa's counter-tariffs on roughly C$27.6 billion of US goods take effect Monday, September 8. Friday's August employment report has consensus at 15.1K after July's 75.1K gain, with the unemployment rate expected to hold at 6.4%.

Fed Watch:

CME FedWatch places roughly 65% odds on a 25 basis point hike at the September 16 FOMC, per Forbes, up from about 36% before Chair Warsh's Jackson Hole address, with no cut priced at any horizon. This morning's soft ADP print is the second consecutive data wobble after Tuesday's ISM manufacturing miss, and neither has moved the pricing meaningfully. Friday's non-farm payrolls report remains the deciding input, with consensus at 55K after July's 23K contraction and the unemployment rate expected to hold at 4.1%. Given Warsh's argument that weak labour supply is holding down the headline number on its own, the unemployment rate remains the line to watch rather than the payrolls print. The Beige Book, due at 2:00pm ET today, offers the Fed's own read on how tariffs and energy costs are feeding through to prices.

Technical Picture:

Resistance: 1.3940, the overnight high that broke the August 28 cap, then 1.3950, CIBC's end of week target.
Support: 1.3887, today's low, then 1.3844, the floor of the band that held from August 28 through September 1.
Outlook: The six session cap at 1.3912 to 1.3914 finally broke overnight, but the move failed to hold and the pair is back below the old cap. A close back inside the band would argue the range is reasserting itself; a second push through 1.3914 with crude steady would put CIBC's 1.3950 target back in play. CIBC's longer term view is unchanged, with the pair returning to 1.3700 by year end. Friday's twin employment reports are the likeliest catalyst in either direction.

Week Ahead:

Friday is the pivotal session, with the Canadian and US employment reports landing simultaneously at 8:30am ET. Both feed directly into the September 16 FOMC and the October Bank of Canada meeting, and both will decide whether this week's failed break above 1.3914 gets a second attempt.

Other Notes:

• Japan's 10 year government bond yield is above 3% for the first time since 1996, per CNBC, keeping pressure on the Bank of Japan and the yen carry trade.
• US durable goods orders and the Beige Book round out today's US calendar; neither is typically market moving, but both feed the September tightening debate.