USD/CAD Market Update

Current Level: High-1.40s (24hr range 1.4064 to 1.4095)

USD/CAD is trading at 1.4092 this morning, up from Tuesday's 1.4065 close, after touching 1.4095 overnight. That extends a steady climb from 1.3990 on September 18. Widening US and Canada rate differentials are doing most of the work, with the move now driven more by US yields than by oil.

Market Overview:

CIBC describes cautious risk appetite this morning, with lower oil prices offset by elevated yields and uncertainty ahead of tomorrow's meeting between President Trump and President Xi. Global bond markets are selling off again, and CIBC reports the US 10 year Treasury trading back above 5.00%. Equity indices are slightly lower after the Nasdaq closed at its first record high since June. The US dollar is firmer against most G10 currencies, with CIBC noting the dollar index has pushed to its highest level since July and continues to build upward momentum. Bloomberg reported the 30 day correlation between the dollar and 10 year yields closed above 0.40 last Friday, the highest in more than two months, which is why the bond move is passing straight through to USD/CAD.

Oil Slides on Iran Diplomacy and Saudi Supply:

Brent crude is trading near US$99 per barrel after falling close to 9% over the past five sessions, according to CNBC. President Trump said US and Iranian officials met for about three hours on Tuesday and described the meeting as very good, which revived hopes for a diplomatic off ramp. CIBC cautions that the two sides remain far apart, with Iran reportedly seeking sanctions relief, unfrozen assets and broader regional concessions before any agreement. On the supply side, Bloomberg reports Saudi Arabia is aiming for a meaningful restart of its East and West pipeline to the Red Sea by Saturday, which would restore a route around the Strait of Hormuz. CIBC notes Brent has fallen more than 5% from recent highs but remains roughly 60% higher year to date and well above levels central banks would find comfortable. Softer crude would normally weigh on the Canadian dollar, and it is doing so, but the dominant driver today is the yield move.

Canadian Data/Outlook:

CIBC reports that Governor Tiff Macklem downgraded the Bank of Canada's fourth quarter growth forecast earlier this week, cutting it from 1.50% to 0.75% and citing the impact of tariffs on business investment and hiring. That is a material revision and it lands on a market that had been pricing a further hike. CIBC's Central Bank Watch now shows a 55% probability of a 25 basis point Bank of Canada hike at the October 28 meeting, with no cut priced. The combination of a halved growth forecast and better than even hike odds is the tension in the Canadian dollar right now, and CIBC strategists read it as supportive for further USD/CAD upside. Canadian retail trade is due Thursday with consensus at -0.8%. A weak print would reinforce the growth downgrade.

Fed Watch:

Fed pricing has continued to firm. CME FedWatch shows a 54.2% probability of a 25 basis point hike at the October 28 meeting, against a 45.8% chance of a hold at 3.75% to 4.00%, with no cut priced. CIBC's own Central Bank Watch puts the October hike probability at 50%. Fed officials Barr and Goolsbee speak today, though CIBC strategists note markets are far more focused on energy prices than on Fed rhetoric at the moment. US data is light until next week, when core PCE and the September jobs report arrive.

Technical Picture:

Resistance: 1.4100, just above this morning's 1.4095 high and the first level CIBC strategists target.
Support: 1.4064, the overnight low. Below that, 1.4000 is the former ceiling the pair cleared on Monday and now the first meaningful floor.
Outlook: The pair has made higher highs and higher lows on each of the last four sessions, and the overnight range of 31 pips was narrow, which points to a grind rather than a spike. A clean break of 1.4100 opens the 1.41 to 1.42 area CIBC is targeting. A close back below 1.4064 would be the first sign the trend is losing momentum, and only a return under 1.4000 would call the breakout into question.

Week Ahead:

Tomorrow's Trump and Xi summit is the dominant near term event risk, with Canadian retail trade the same morning the key domestic release. Next week is heavier for the pair: US core PCE on September 30 and the September jobs report on October 2 will set October Fed pricing, and the Bank of Canada and Fed both decide on October 28.

Other Notes:

• CIBC reports the Nasdaq closed at its first all time high since June, with investors reluctant to add risk ahead of the Trump and Xi meeting.
• CIBC notes both the Bank of Canada and the Federal Reserve decide on October 28, so the two central bank events land on the same day.