USD/CAD Market Update

Current Level: Low-1.40s (24hr range 1.3976 to 1.4015)

USD/CAD is trading at 1.4011 this morning, up from Thursday's 1.3991 close, after reaching 1.4015 overnight. This is the first time in the current advance that the pair is holding above 1.4000 rather than just touching it. The move follows a week of central bank decisions from the Fed, the Bank of England and the Bank of Japan. The common message is that rates are staying higher for longer, and that has kept the US dollar firm against most major currencies.

Market Overview:

Risk appetite is mixed as investors weigh the week's policy decisions. CIBC notes global bond yields moving higher again, with the US 10-year Treasury yield back near 5.00%. Trading Economics shows the 10-year reached about 5.01% on Wednesday, its highest level in 19 years. CIBC's view is that the brief bond rally after the Fed and the Bank of England has faded, and that concern over government debt issuance remains the main pressure on long-term yields. Equities are mixed, with semiconductor stocks still outperforming. The US dollar is stronger against most G10 currencies because Treasury yields continue to offer attractive returns.

Bank of Japan Hikes, but Signals a Slow Path:

The Bank of Japan raised its policy rate by 25 basis points to 1.25%, as expected. That is the highest level since 1995, per CNBC. The vote was 7 to 2, with board members Toichiro Asada and Ayano Sato dissenting against the hike. CIBC reports that Governor Ueda stressed the need to avoid tightening too quickly and said the evidence of sustainable 2% inflation is not yet complete. Markets read the decision as a slower normalization path. The yen weakened, and CNBC reports the US dollar briefly traded above 157 yen. CIBC strategists raised their year-end USD/JPY target to the 158 to 160 range. Their view is that further currency intervention by Japan is now more likely than another near-term rate hike. For USD/CAD, the result reinforces the broad US dollar strength seen this week.

Canadian Data/Outlook:

There is no Canadian data today. CIBC attributes the break above 1.4000 to the widening gap between US and Canadian yields. Trading Economics notes the Canadian dollar is at its weakest level in more than a month following the Fed's decision. CIBC also points out that positioning in the Canadian dollar has largely normalized, and that renewed interest in carry trades funded in Canadian dollars could add further upside to USD/CAD. On policy, CIBC's Central Bank Watch shows a 61% implied probability of a 25 basis point Bank of Canada hike at the October 28 meeting, up from 50% on Thursday, with no cut priced. The next domestic tests are July retail trade on Thursday and July GDP on September 29.

Fed Watch:

The Fed raised the federal funds target range to 3.75% to 4.00% on Wednesday, and its projections point to one more hike this year. Pricing for the October 28 meeting remains close to even. CME FedWatch showed a 50.9% probability of a 25 basis point hike in October as of September 17. CIBC's Central Bank Watch puts it at 58% this morning. No rate cut is priced. CIBC's read is that markets continue to price a higher for longer environment after this week's decisions. With October pricing near a coin toss, US data over the next few weeks should carry extra weight for the dollar.

Technical Picture:

Resistance: 1.4015, this morning's high. Above that, 1.4080 is CIBC's fair value estimate and 1.4100 is the level CIBC strategists are targeting.
Support: 1.3976, the overnight low. Below that, 1.3950 is the top of the zone that capped the pair earlier this week and now acts as support.
Outlook: USD/CAD has risen in each of the last five sessions and has moved from 1.3869 on September 13 to 1.4011 today. A daily close above 1.4000 would confirm the break and keep 1.4080 to 1.4100 in view. A return below 1.3976 would suggest the move above 1.4000 lacks follow through, with 1.3950 the level that would signal a deeper pullback.

Week Ahead:

With the major central bank decisions behind us, next week is light for USD/CAD. Canadian retail sales on Thursday and July GDP on September 29 are the main domestic releases. Both will shape whether the market adds to the October Bank of Canada hike pricing, which is the main offset to US dollar strength.

Other Notes:

• WTI crude is down 0.88% to US$101.01 per barrel this morning, per Fortune, extending the pullback from above US$104 earlier in the week. Lower oil removes some support from the Canadian dollar.
• Gold is trying to stabilize after its sharp correction. CIBC notes that a return to the highs likely requires lower real yields, a new geopolitical catalyst, or official action to cap long-term rates.