USD/CAD Market Update

Current Level: Mid-1.40s (24hr range 1.4025 to 1.4052)

USD/CAD is trading at 1.4050 this morning, up from Monday's 1.4036 close, after reaching 1.4052 overnight. The pair is now well clear of 1.4000, which it spent most of last week testing. Lower oil prices are the main driver. Softer crude reduces support for the Canadian dollar at the same time as the Fed and Bank of Canada outlooks move in different directions.

Market Overview:

CIBC describes a constructive start for risk assets, helped by lower oil prices and hopes for a productive meeting between President Trump and President Xi later this week. Global bonds are firmer as inflation concerns ease with energy prices. Equities are holding near recent highs after Monday's rally in artificial intelligence shares took the Nasdaq to a record. The US dollar is little changed against most major currencies, as CIBC notes lower yields are being offset by weaker commodity prices. That mix favours USD/CAD, since the Canadian dollar is more exposed to oil than most of its peers.

Oil Retreats on Supply and Diplomacy Headlines:

CIBC reports WTI falling toward US$93 per barrel and Brent slipping back below US$100. Bloomberg reports crude fell for a fourth straight session on Monday. CIBC attributes the move to Saudi Arabia moving closer to restarting its East-West pipeline and to reports of possible progress in US and Iran diplomacy. Bloomberg notes Saudi crude flows through the Strait of Hormuz have picked up in recent days. CIBC cautions that crude remains in an uptrend from its July lows and that one headline-driven decline does not confirm a reversal. For USD/CAD, a sustained drop in oil would keep pressure on the Canadian dollar.

UN Assembly and the Trump and Xi Summit:

President Trump addresses the UN General Assembly today. CIBC says markets will watch for comments on Iran, energy, trade and China, though it does not expect the speech itself to move markets much. The larger event is the Trump and Xi summit later this week, where investors want progress on trade, tariffs and restrictions on artificial intelligence technology. CIBC sees a reasonable chance of some form of US and China agreement. A deal would support risk appetite, which has generally helped the Canadian dollar.

Canadian Data/Outlook:

Governor Macklem warned in Halifax on Monday that the latest US tariffs could roughly halve fourth-quarter growth to below 1% if they remain in place, according to The Canadian Press. He said the tariffs directly affect about 5% of Canadian goods exports to the US, but that the larger risk is uncertainty delaying business investment and hiring. He also said inflation would be expected to edge higher in the coming months if oil stays near US$100. That leaves the Bank facing downside risks to growth and upside risks to inflation at the same time. CIBC's Central Bank Watch now shows a 53% probability of a 25 basis point Bank of Canada hike at the October 28 meeting, down from 60% on Monday, with no cut priced. CIBC views that hike pricing as too aggressive, which is part of its case for a softer Canadian dollar. July retail trade is due Thursday, with consensus at -0.8%.

Fed Watch:

Fed officials continue to lean hawkish after last week's hike. St. Louis Fed President Musalem told Reuters that further rate increases will likely be needed, and that without more restraint inflation is more likely to be well above 2% in 18 months than at target. Chicago Fed President Goolsbee said the Fed cannot ignore supply shocks that are arriving more often and lasting longer, even if the response causes some economic hardship, per Bloomberg. CIBC's Central Bank Watch shows a 48% probability of a 25 basis point Fed hike at the October 28 meeting, compared with 59.7% on CME FedWatch as of September 20. No cut is priced. US data is light this week, with August durable goods orders on Friday.

Technical Picture:

Resistance: 1.4052, this morning's high. Above that, 1.4100 is the level CIBC strategists continue to target.
Support: 1.4025, the overnight low. Below that, 1.4000 is the former ceiling the pair broke through on Monday and now acts as support.
Outlook: The pair has broken out of the tight range around 1.4000 that held for most of last week. Holding above 1.4025 keeps 1.4100 in view. CIBC expects the pace of gains may slow over the next couple of weeks, but still sees the Canadian dollar on the defensive. A return below 1.4000 would suggest the breakout has stalled.

Week Ahead:

The Trump and Xi summit is the main event risk this week, with Canadian retail trade on Thursday the key domestic release. A weak retail print would add to signs of a slowing Canadian economy. Next week brings US core PCE on September 30 and the September jobs report on October 2, both important for October Fed pricing.

Other Notes:

• CIBC notes Nvidia's valuation has fallen to near decade lows even as analysts forecast strong earnings growth, a sign some investors doubt that AI spending can be sustained.
• CIBC reports global bond markets are firmer this morning as lower oil prices ease inflation concerns.