USD/CAD Market Update

Current Level: High-1.38s (24hr range 1.3834 to 1.3882)

USD/CAD is trading near 1.3866, up 31 pips from Thursday's close of 1.3835, inside a 1.3834 to 1.3882 range. The pair opened at 1.3836 and broke to a new weekly high after the August consumer price report. Core inflation came in a tenth above consensus, and futures moved decisively toward a Federal Reserve rate increase next Wednesday. Crude fell close to 3% at the same time, removing the offset that has supported the Canadian dollar through most of the past two weeks.

Market Overview:

Risk sentiment is defensive but the moves are orderly. The US dollar is firmer against G10 counterparts following the inflation release. Treasury yields tell a more nuanced story. The 10 year sits at 4.93%, down 3.5 basis points on the day, while the 2 year is at 4.60%, up a basis point, per Trading Economics. The front end is doing the repricing work, which is what a policy driven move looks like. The 10 year remains near its highest levels since 2023 and within seven basis points of the 5.00% threshold the market has been watching. For USD/CAD the two channels that have been offsetting each other since late August are now aligned. Wider US and Canada rate spreads push the pair higher, and for the first session in some time crude is not pushing back.

US Inflation Beats on the Core:

The Bureau of Labor Statistics reported that the consumer price index rose 0.4% in August and 3.4% over the past twelve months, both matching consensus. The core index, which excludes food and energy, rose 0.3% on the month against a 0.2% forecast, and eased to 2.4% year over year from 2.5% in July, per CNBC. The monthly core figure is what the market traded. Energy drove the headline, with gasoline prices up 3.9% and accounting for more than a third of the index gain, and the broader energy index up 2.1%. That composition matters for how the Federal Reserve reads the print. A headline pushed by gasoline can be argued away as a relative price shock. A core figure running a tenth hot in the same month suggests the energy impulse is reaching services and non energy goods, which is the transmission channel yesterday's producer price data pointed to.

Crude Pulls Back From the Highs:

West Texas Intermediate is at $99.51, down 2.90% on the day, and Brent is at $104.98, down 2.46%, per Trading Economics. Both benchmarks are still roughly 9% higher on the week, so this is a pullback within a strong uptrend rather than a reversal. Two forces are pulling in opposite directions. The International Energy Agency sharply downgraded its demand outlook, forecasting a 2.5 million barrel per day contraction in 2026, the largest decline since the pandemic, which is demand destruction from the price level itself. Against that, supply risk in the Middle East has not eased. The net effect today is a lower oil price, and that removes the support the Canadian dollar has leaned on since late August.

Canadian Data/Outlook:

The domestic calendar is empty today. The Bank of Canada held its policy rate at 2.25% on September 2, a seventh consecutive hold, and flagged stronger upside risks to inflation from the Middle East conflict, limited progress reopening the Strait of Hormuz, and the combination of new US tariffs and Canadian counter tariffs. Canadian headline inflation has been running near 3%, driven mainly by gasoline, while inflation excluding gasoline is 2.2% and the core measures sit close to 2%. The next decision is October 28, outside the two week window. The near term input is Monday's August consumer price report at 8:30am ET, where consensus looks for no change on the month after July's 0.5% gain, with the trimmed mean at 1.9% and the median at 2.0% year over year. If the core measures hold near 2% while the Federal Reserve raises, the expected policy gap widens and the rate channel keeps working against the Canadian dollar.

Fed Watch:

Futures price approximately a 90% probability of a 25 basis point increase at the September 16 meeting, per CME FedWatch, up from roughly 69% before this morning's release. That would take the federal funds target to 4.00% from 3.75%. This was the last major inflation input before the committee meets. Chair Warsh set the frame at Jackson Hole by calling the inflation figures concerning, and pricing has climbed steadily since. Wednesday also brings updated economic projections at 2:00pm ET and the press conference at 2:30pm ET. With a hike close to fully priced, the dollar reaction will depend on the projections and the guidance on what follows, not on the decision itself.

Technical Picture:

Resistance: 1.3882 is today's high and the highest level since September 4. A sustained break opens 1.3941, the early September high.
Support: 1.3834 marks today's low and the opening area. Below that, 1.3797 from Thursday, then 1.3765 from earlier in the week.
Outlook: The pair has closed higher in three of the last four sessions and has now recovered the entire early September pullback. The bias favours the topside into the Fed meeting, though positioning ahead of Wednesday argues for consolidation between 1.3834 and 1.3882 rather than a clean break.

Week Ahead:

Wednesday is the week. Monday's Canadian inflation report is the only domestic input before it, and a soft print would widen the expected policy gap further. Thursday brings the Bank of England and the Bank of Japan back to back, and the Bank of Japan is the one with a live tightening question attached to it.

Other Notes:

• Houthi forces seized the Yemeni port city of Mocha on Thursday, tightening their position around the Bab el-Mandeb Strait, per Al Jazeera. The supply risk premium that has driven crude since late August remains in place despite today's price decline.
• The 10 year and 2 year Treasury yields moved in opposite directions today, with the curve flattening as the front end priced the hike. That is a market pricing policy tightening rather than a higher long run inflation path.
• A Treasury buyback operation came in light, with $5.2 billion repurchased against a $6 billion cap, per Trading Economics, adding a small amount of upward pressure to yields.