USD/CAD Market Update

Current Level: Low-1.38s (24hr range 1.3786 to 1.3847)

USD/CAD is trading near 1.3801, down 45 pips from Wednesday's close of 1.3846, inside a 1.3786 to 1.3847 range. The pair opened at the top of that range and has fallen steadily through the morning as Waller's comments took the edge off the recent bond selloff and pulled the US dollar lower against most G10 currencies. The move extends this week's pattern of USD/CAD failing to hold gains above 1.39, with tomorrow's dual employment reports from Canada and the US now the deciding input before the September 16 Fed decision.

Market Overview:

Risk appetite is improving after a rough start to the week. The US dollar is softer against most major counterparts as Waller's comments ease pressure on the front end, and stabilizing bond markets are providing relief to equities ahead of tomorrow's payrolls report, per CIBC. The Japanese yen led G10 gains, jumping more than one percent to a one month high as traders raised bets on a Bank of Japan rate hike this month following hawkish comments from board member Hajime Takata, per CNBC and Bloomberg, with markets also on alert for possible intervention around the BoJ's mid September policy meeting. Brent crude eased to about US$95 a barrel, snapping a three session rally, as markets weighed continued Middle East hostilities between the US and Iran against reports that crude shipments through the Strait of Hormuz are still moving at roughly 8 million barrels a day.

Fed Governor Waller Cools Rate Hike Bets:

Fed Governor Christopher Waller said Thursday he is willing to support holding the policy rate at its current level if inflation continues to slow, but would consider a hike if inflation comes in hot, per Bloomberg. Waller said the three month inflation rate has slipped from 4.76% in February to 3.05% currently, calling the pace of disinflation encouraging even as he conceded inflation remains meaningfully above the Fed's 2% target. He added that his decision at the September meeting will be heavily influenced by next week's August CPI report, due September 11. The comments pulled the US 10 year Treasury yield down roughly 5 basis points from Wednesday's 4.79% close, moving it back below the 4.75% to 5.00% zone that has historically triggered Treasury or Fed reaction, per CIBC. CIBC's own pricing now shows a 49% probability of a 25 basis point hike at the September 16 FOMC, down from roughly 65% earlier this week, with no cut priced at any horizon.

Canadian Data/Outlook:

The Bank of Canada's hold at 2.25% on Wednesday continues to be digested. Governor Macklem flagged rising inflation risks tied to both the Middle East conflict and escalating US-Canada trade tensions during his press conference, but stopped short of committing to any near term policy move, per CIBC. CIBC's central bank pricing puts a 25 basis point hike at the October 28 meeting at 35%, with no cut priced. Tomorrow's August employment report is the next major data point, with consensus at 15.1K after July's 75.1K gain and the unemployment rate expected to hold at 6.4%.

Fed Watch:

Tomorrow's non farm payrolls report carries added weight ahead of next week's CPI. Consensus is for a 55K gain after July's 23K contraction, with the unemployment rate expected to hold at 4.1%. CIBC's own economists expect a softer 40K print, with below consensus wage growth potentially easing some of the market's inflation concerns. As Waller noted, the September 11 CPI report remains the more decisive input for the Fed's September 16 decision, per Bloomberg.

Technical Picture:

Resistance: 1.3847, this morning's high and session open, then 1.3950, CIBC's near term upside target.
Support: 1.3786, today's low, then 1.3700, CIBC's year end target for the pair.
Outlook: USD/CAD has traded straight down since the open, unable to hold levels above 1.3847 as Waller's comments took the wind out of the dollar bid. CIBC's strategists continue to favour USD/CAD upside toward 1.3950 on stronger US data and trade uncertainty, a call that is being tested by this morning's price action. Tomorrow's twin employment reports are the likeliest catalyst to decide whether the pair holds today's 1.3786 low or reasserts CIBC's upside target.

Week Ahead:

Tomorrow's session is pivotal, with the Canadian and US employment reports landing simultaneously at 8:30am ET. Both feed directly into the September 16 FOMC and the October 28 Bank of Canada meeting, and both will decide whether this morning's break below 1.3847 extends or fades.

Other Notes:

• The yen's rally is drawing added attention with the Bank of Japan's policy meeting in mid September and a holiday period around it giving authorities a window to intervene in thinner trading, per Bloomberg.
• US weekly jobless claims, the July trade balance, and the ISM services index round out today's US calendar ahead of tomorrow's payrolls.