USD/CAD Market Update

Current Level: Low-1.39s (24hr range 1.3865-1.3923)

USD/CAD is trading in the low-1.39s this morning, up from Friday's 1.3872 close, after touching 1.3923 overnight. Canadian inflation landed exactly in line with expectations and did nothing to shift Bank of Canada pricing. The dominant driver is the other side of the pair: a firmer US dollar backed by 10-year Treasury yields sitting just under 5.00% and a market that has largely priced a Fed hike on Wednesday.

Market Overview:

Risk appetite is weaker to start the week. Equities are lower, with AI-linked names leading the declines. Global bond yields continue to push higher, driven by sticky inflation, rising energy costs, and growing expectations that the Fed is about to start tightening again. CIBC notes the US 10-year Treasury yield at 4.98%, and CNBC reported the benchmark at 4.99% this morning, the highest since October 2023. Broad dollar strength is the clean read across G10. The Canadian dollar is outperforming most G10 peers on the back of the oil rally, but that relative strength is not enough to offset the dollar bid.

Energy Supply Shock:

Oil is the story underneath the inflation story. Drone strikes forced a system-wide shutdown of Saudi Arabia's East-West pipeline, the route that carries Saudi exports to the Red Sea port of Yanbu and bypasses the Strait of Hormuz entirely. Attacks on shipping near Hormuz compounded the disruption. WTI is trading above US$103 per barrel per CIBC, with Brent quoted near US$108 by Euronews and Bloomberg, extending a roughly 9% gain from the prior week. This normally supports the Canadian dollar on the crosses, and it has. It also feeds directly into the inflation problem that is driving global yields higher, which supports the US dollar more. For USD/CAD the second effect is currently winning.

AI Names Lead Equity Losses:

Technology stocks are leading losses after Anthropic CEO Dario Amodei published an essay calling for a slower pace of development on the most advanced AI models on safety grounds, with supportive comments from other industry leaders. CNBC reported the S&P 500 down 0.7% and the Nasdaq Composite down 1.0%. The selling has concentrated in AI infrastructure names as investors question whether spending on chips, data centres, and power can hold the pace current valuations imply. CIBC's read is that investors were looking for a reason to take profits and found one. Absent actual regulation, a voluntary industry slowdown is a difficult thing to price.

Canadian Data/Outlook:

Statistics Canada reported August CPI at 3.0% year over year, unchanged from July and in line with consensus. On a monthly basis prices fell 0.1%, also matching expectations. The Bank of Canada's preferred core measures were steady: trimmed CPI at 1.9% and median CPI at 2.0%, both in line. Gasoline remains the source of the overshoot, up 22.8% year over year versus 25.7% the prior month, and excluding gasoline the index rose 2.4%. Shelter costs and travel tours edged higher. CIBC's take is that headline inflation is still running hotter than the Bank would like, but the absence of broader spillover means underlying pressures stay contained. Pricing for the Bank of Canada was effectively unmoved on the release. CIBC's Central Bank Watch puts the odds of a 25 basis point hike at the October 28 meeting at 74%, with no probability assigned to a cut.

Fed Watch:

Wednesday's FOMC decision is the event that matters this week. CIBC economists now expect a 25 basis point hike to 4.00%, arguing policymakers will respond to higher oil prices, sticky inflation risks, and surging bond yields. CIBC's Central Bank Watch shows a 90% implied probability of that hike; CME FedWatch had it at 85.5% as of September 12, up from 66% on August 31 and roughly 44% in early August. The repricing followed Chair Kevin Warsh's Jackson Hole remarks and hotter inflation data, with August US consumer prices at 3.4% year over year and core rising 0.3% on the month. No cut is priced at any meeting this year. Because the hike itself is largely in the price, the market impact will come from the guidance. The question is whether this is the opening move of a new tightening cycle or a single hike followed by a return to wait-and-see. CIBC frames it the same way. A hawkish dot plot and a firm message from the Chair would argue for further dollar strength; anything that reads as one-and-done opens the door to a USD/CAD pullback.

Technical Picture:

Resistance: 1.3923, this morning's high and the first hurdle. Above that, 1.3940 is the area CIBC strategists are targeting this week, with 1.4000 the next psychological level beyond.
Support: 1.3865, the overnight low. Below that, 1.3825 marks the September 11 low and the base of last week's advance.
Outlook: The pair has now closed higher in four of the last five sessions, advancing from 1.3806 on September 9 to 1.3920 this morning. The trend is intact and the bias stays to the upside into Wednesday. CIBC cites a modestly hawkish Fed, elevated geopolitical risk, high oil prices, and Canadian dollar overvaluation against their fair value model as the case for further gains. A break above 1.3940 puts 1.4000 in play. A failure to hold 1.3865 would be the first sign the move is stalling ahead of the decision.

Week Ahead:

Wednesday afternoon is the pivot point for the week. The hike is priced, so positioning will turn on the projections and the press conference. For Canadian dollar exposure, note that the Bank of Canada's own decision is not until October 28, which leaves five weeks of Fed-driven direction before domestic policy re-enters the picture.

Other Notes:

• Energy is now a two-sided risk for the Canadian dollar. Higher crude supports the terms of trade, but it is also the mechanism pushing global yields toward 5.00% and strengthening the US dollar. The correlation that usually helps the Canadian dollar is working against it.
• The last time the US 10-year traded at these levels was October 2023. Bloomberg notes the move is raising fresh concerns about borrowing costs across the economy and the government's debt math.
• The Bank of Japan is expected to lift rates to a multi-decade high on Thursday. A gradual normalisation message would be a yen negative and would reinforce the broad dollar bid into the back half of the week.