USD/CAD Market Update

Current Level: Mid-1.39s (24hr range 1.3921 to 1.3944)

USD/CAD is trading at 1.3937 this morning, up from Tuesday's 1.3920 close, after reaching 1.3944 overnight. The pair has now closed higher for three straight sessions. The US dollar is firm across the G10 basket as traders take final positions before the FOMC announcement at 2:00pm ET. Stronger than expected US retail sales added to the case for a firm message from the Fed, while the Canadian dollar has drawn little lasting support from higher energy prices.

Market Overview:

Risk appetite is cautious. Investors are reluctant to add exposure before the decision and the press conference that follows. CIBC notes equities modestly higher, helped by the August retail sales beat. Bond markets are getting some relief after weeks of selling. The US 10-year Treasury yield has slipped back below 5.00%, per CIBC, after breaking above that level earlier this week for the first time since 2007. CIBC's view is that the key question for bonds is whether today's decision confirms the recent rise in yields or pushes back against it. The US dollar remains supported against most major currencies.

Oil Eases, Supply Risk Remains:

Crude prices are lower this morning but remain above US$100 per barrel. CNBC reports Brent down about 1.0% to US$107.64 and WTI down about 1.3% to US$104.46. CIBC quotes WTI easing toward US$103. The pullback follows an unexpected increase in US crude inventories, per CNBC. The supply picture has not improved. Saudi Arabia has suspended crude loadings at its Red Sea port of Yanbu after the attack that shut its East-West pipeline, as reported by OilPrice.com and CNBC. For USD/CAD, higher oil helps the Canadian dollar against other currencies, but it also feeds the inflation concerns driving global yields and the Fed outlook. That second effect continues to favour the US dollar.

Canadian Data/Outlook:

There is no Canadian data today. The domestic news is fiscal. At the Canada Investment Summit in Toronto on Tuesday, Prime Minister Mark Carney announced the Productivity Mega Deduction, which makes immediate expensing permanent and extends it to roughly two thirds of business investment in capital assets. The government says this lowers Canada's marginal effective tax rate on new business investment to 6.4% from 13%, the lowest in the G7 and less than half the US rate. CBC reports an estimated cost of $36 billion over five years. The Prime Minister's Office says the summit generated close to $500 billion of new investment commitments. The measure is a longer term story for capital flows and did not change the near term picture, with USD/CAD moving higher after the announcement. On policy, CIBC's Central Bank Watch shows a 65% implied probability of a 25 basis point Bank of Canada hike at the October 28 meeting, down from 68% on Tuesday, with no probability assigned to a cut.

Fed Watch:

The FOMC announces at 2:00pm ET today, alongside the Summary of Economic Projections, with Chair Kevin Warsh's press conference at 2:30pm ET. Markets expect a 25 basis point hike to a target range of 3.75% to 4.00%, which would be the first Fed increase since 2023. CIBC's Central Bank Watch puts the implied probability at 93%. CME FedWatch had the hike at 84.1% as of September 14. With the move largely priced, CIBC sees three paths. If Warsh repeats the higher for longer message from Jackson Hole and argues policy is not yet restrictive enough, markets would price more tightening, which is positive for the US dollar. If he notes that higher bond yields have already tightened financial conditions, the hike may be read as a single move followed by a pause, which is broadly neutral for the dollar. A hike paired with more comfort on the inflation outlook would be the dovish outcome and negative for the US dollar, though it could provoke a further selloff in bonds. CIBC's framing is that today is less about the 25 basis points and more about whether the Fed sees inflation risk the way the bond market does. Stronger retail sales reduce the pressure on the Fed to sound dovish.

Technical Picture:

Resistance: 1.3950, the top of the 1.3930 to 1.3950 zone CIBC strategists identify as overhead resistance, just above this morning's 1.3944 high. Above that, 1.4000 is the next psychological level.
Support: 1.3921, this morning's low. Below that, 1.3896 is Tuesday's low and the base of this week's consolidation.
Outlook: The pair has advanced from 1.3872 on September 11 to 1.3937 today, and the upward trend remains intact. CIBC expects a modestly hawkish Fed to be enough to carry USD/CAD through resistance and toward the high-1.39s. A close above 1.3950 would open 1.4000. A break below 1.3896 after the decision would suggest the market had already priced a firm Fed and would be the first sign of a pullback. Expect the range to widen sharply between 2:00pm and the end of the press conference.

Week Ahead:

This afternoon is the event of the week for USD/CAD. Thursday brings decisions from the Bank of England and the Bank of Japan, which will show whether the global tightening theme extends beyond the Fed. Hedgers with near term exposure should treat 2:00pm ET today as the main risk window.

Other Notes:

• UK inflation for August came in at 3.1% year over year, in line with consensus and up from 2.9%. The Bank of England is expected to hold at 3.75% on Thursday.
• The Bank of Canada's own decision is not until October 28, leaving several weeks in which Fed guidance and oil are likely to set the direction for USD/CAD.