USD/CAD Market Update

Current Level: Upper-1.39s (24hr range 1.3981 to 1.4002)

USD/CAD is trading at 1.3988 this morning, essentially unchanged from Wednesday's 1.3989 close, after touching 1.4002 overnight. The pair gained 69 pips on Wednesday as the Fed decision and Chair Kevin Warsh's comments on inflation lifted US yields. This morning the move has paused. Oil is lower, global bonds are rallying, and CIBC notes the US dollar is slightly softer against most major currencies.

Market Overview:

Risk appetite is recovering after Wednesday's selloff. Fortune reported US stocks sliding toward their lowest level since July following Warsh's press conference. CIBC notes equities bouncing this morning as bond yields and oil both decline. Global bonds are rallying after the Bank of England scaled back its bond sales. CIBC's view is that interest rates remain the main driver for risk assets, and that stocks can recover if yields keep falling despite the Fed's firmer message. For USD/CAD, a softer US dollar and weaker crude are offsetting each other, which has left the pair flat near its highs.

Fed Hikes and Signals More:

The FOMC voted unanimously to raise the federal funds target range by 25 basis points to 3.75% to 4.00%, its first increase since 2023, per CNBC. The hike was fully expected. The guidance was firmer. The median projection shows one more hike before year end, with policy staying restrictive through 2027, per CIBC. Officials raised their inflation and growth forecasts and lowered their unemployment projections. CIBC also points out that the statement no longer blames supply shocks for elevated inflation, a sign the Fed is focusing more on demand-driven price pressure. Warsh told reporters that inflation is still too high, per CNBC. Bloomberg notes his press conference ran about 30 minutes, the shortest since Fed chairs began holding regular press conferences in 2011. The US 2-year Treasury yield rose more than 7 basis points to 4.738% on Wednesday, and the 10-year yield moved back above 5.00%, per CNBC. CIBC's read is that the message mattered more than the move: rates are likely to stay higher for longer, and the bar for any near-term easing has risen.

Bank of England Scales Back Gilt Sales:

The Bank of England held Official Bank Rate at 3.75% this morning. Three members voted for a hike and six for no change, in line with expectations. The larger news was on the balance sheet. CIBC reports the Bank will stop selling long-dated gilts, pause its quantitative tightening program until April 2027, and look at moving future bond sales to the Debt Management Office rather than selling directly into the market. That reduces expected gilt supply and should help cap long-term UK yields, which were approaching 6.00% on the 30-year earlier this week. CIBC sees this as possibly the first of several central bank adjustments aimed at containing long-term yields without formally restarting bond purchases.

Oil Pulls Back:

Crude prices are lower. Trading Economics has WTI near US$102 per barrel, and CIBC has WTI slipping toward US$100, down from above US$104 early in the week. The driver is better supply news from Saudi Arabia. CNBC reports Saudi Aramco is working to bypass the damaged section of its East-West pipeline, aiming to restore about half its capacity within days and full operation in roughly six weeks. Some exports are also being shifted through the Strait of Hormuz to cover the shortfall. For USD/CAD, lower oil removes some support from the Canadian dollar, but it also eases the inflation concerns that have been pushing global yields and the US dollar higher.

Canadian Data/Outlook:

The domestic calendar is quiet until next week. Statistics Canada releases July retail trade on Thursday, September 24, and July GDP on Tuesday, September 29. On policy, CIBC's Central Bank Watch now shows a 50% implied probability of a 25 basis point Bank of Canada hike at the October 28 meeting, down from 65% on Wednesday, with no cut priced. CIBC's own forecast is more patient. Its strategists expect the Bank of Canada to begin tightening later, in the first quarter of 2027. That gap with a Fed that has already started raising rates is the core of CIBC's case for further USD/CAD upside.

Fed Watch:

CIBC economists expect another 25 basis point hike at the October 28 meeting. Market pricing is close to even. CME FedWatch showed a 50.9% probability of an October hike as of September 17, and CIBC's Central Bank Watch puts it at 56%. No rate cut is priced for the rest of the year. CNBC reports fed funds futures assigning roughly 40% odds that the target range ends December at 4.25% to 4.50%, which would mean two more hikes. With October pricing near 50%, incoming US data should carry more weight than usual for the dollar.

Technical Picture:

Resistance: 1.4002, this morning's high and the first trade above 1.4000 in the current advance. Above that, 1.4100 is the near-term level CIBC strategists are targeting.
Support: 1.3981, the overnight low. Below that, 1.3950 is the top of the 1.3930 to 1.3950 zone that capped the pair earlier this week and now acts as support. Wednesday's low at 1.3914 is the next level.
Outlook: USD/CAD rose in each of the last three sessions and has moved from 1.3806 on September 10 to 1.3988 today. The break above 1.3950 after the Fed keeps the upward trend intact. A daily close above 1.4000 would open 1.4100. A return below 1.3950 would suggest the post-Fed buying has run its course for now.

Week Ahead:

Tonight's Bank of Japan decision is the next global test of the tightening theme, with a hike widely expected. For USD/CAD, the focus then shifts to Canadian retail sales and GDP next week, which will shape whether the market rebuilds the October Bank of Canada hike pricing it gave up this week.

Other Notes:

• The Japan Times reports Governor Kazuo Ueda signalled a September hike was likely, with policy to be set with upside price risks in mind.
• US 10-year Treasury yields remain near 5.00%, a level broken earlier this week for the first time since 2007. A further bond rally is the clearest route to a softer US dollar in the near term.