USD/CAD Market Update

Current Level: Low-1.41s (24hr range 1.4097 to 1.4124)

USD/CAD is trading at 1.4123 this morning, up from Wednesday's 1.4104 close, after touching 1.4124 overnight. That is the sixth consecutive session of higher highs and extends the climb from 1.3995 on September 18. Wednesday's flash purchasing managers' data out of the United States was the catalyst. It pushed US yields sharply higher and carried the US dollar with them.

Market Overview:

Risk sentiment is cautious and the move is being driven by the US rates market rather than by commodities. Bond yields jumped across the curve on Wednesday. CNBC reported the two year Treasury yield up 17 basis points to 4.91%, its highest since 2024, and the 30 year yield up 12 basis points to 5.41%, the highest since 2007. CNN reported the 10 year yield touching 5.1% for the first time in 19 years. The US dollar is at a two month high against the major currencies, per Trading Economics. The Canadian dollar is not being singled out here. It is a broad US dollar move, and USD/CAD is following the yield spread.

US Growth Surprise Resets the Rate Path:

S&P Global's flash US composite output index rose to 58.4 in September from 56.0 in August, the fourth straight month of acceleration and the fastest expansion since July 2021, according to S&P Global and Seeking Alpha. Manufacturing climbed to 57.0 from 53.9 and services to 58.7 from 54.6. Employment rose at a pace not seen since June 2022. The inflation side was the part that moved markets. Input costs jumped at the steepest rate in nearly four years, with supply chain delays and capacity constraints feeding through. PYMNTS reported the survey points to annualised growth near 4.0% for the third quarter. A second tier release rarely does this much, but it arrived into a market already leaning hawkish and it repriced the entire front end.

Energy Firms Again on Iran Transit Risk:

Crude has reversed last week's decline. Trading Economics shows West Texas Intermediate at US$93.96 on Thursday, up 1.95% on the session, and OilPrice.com reports Brent holding above US$102 as talks stall. CNBC reported oil snapping a five session losing streak on Wednesday. The driver is transit risk. Iranian President Masoud Pezeshkian told the UN General Assembly that Iran would not allow freedom of navigation through the Strait of Hormuz while sanctions and a US blockade remain in place. Higher crude would normally support the Canadian dollar, and that channel is offsetting some of the yield driven pressure, but it is not enough to stop the advance.

Canadian Data/Outlook:

Statistics Canada reported July retail sales down 0.7% to $73.7 billion this morning, against consensus of -0.8%, per BNN Bloomberg. The headline was marginally better than expected but the detail was not. Volumes fell 1.1%, sales declined in eight of nine subsectors led by general merchandise, and motor vehicle and parts dealers posted their first drop in four months at -0.8%. The advance estimate for August points to a 1.3% gain, which Statistics Canada cautioned is subject to revision. The near consensus headline means the print does not change the Bank of Canada calculus much on its own. Markets still treat the October 28 decision as close to a coin flip. Overnight index swap pricing implied roughly a 50% probability of a hike from the current 2.25% overnight rate as of mid September, according to Investment Executive and money.ca, and the odds have been tracking oil and bond yields more than domestic data.

Fed Watch:

Markets have moved decisively toward another hike. CME FedWatch pricing for a 25 basis point increase at the October 27 and 28 meeting rose into the 70% to 77% range on Wednesday, up from roughly 55% the prior day, with the exact reading depending on when it was captured, per CNBC and CME FedWatch. No cut is priced anywhere in the visible curve. Governor Barr's comments alongside the PMI release were cited by CNBC as part of the repricing. The next real tests are next Wednesday's core PCE and the September employment report on October 2. A firm PCE print would lock in October and start pulling December into play.

Technical Picture:

Resistance: 1.4124, this morning's high and the top of the current advance. Above that there is little structure until 1.4200.
Support: 1.4097, the overnight low. Below that, 1.4057 is Wednesday's low and 1.4000 is the level the pair cleared on September 21.
Outlook: The trend is intact and orderly. Six straight sessions of higher highs and higher lows, with today's 27 pip range the narrowest of the week, which is consolidation inside an uptrend rather than exhaustion. Holding above 1.4097 keeps 1.4200 in view. A break back below 1.4057 would be the first signal that the yield driven move is pausing.

Week Ahead:

Core PCE on Wednesday and payrolls on October 2 are the two releases that matter for this pair. The PMI survey flagged the fastest input cost growth in nearly four years and the strongest hiring in over four, so both prints carry upside risk. Confirmation on either would extend the yield move. A soft payrolls number is the most likely source of a pullback in USD/CAD over the next two weeks.

Other Notes:

• Yield pressure is global, not just American. Japanese 10 year yields are approaching 30 year highs and euro area sovereign spreads have widened, which limits how much of a safe haven bid the US dollar has to give back.
• The September flash surveys showed the United Kingdom still expanding and the euro area accelerating, so this is a synchronised pickup in advanced economy activity rather than a US only story. That argues for higher global rates broadly, not just a wider US and Canada spread.
• Oil is now working against the USD/CAD advance rather than with it. If crude holds above US$100 while yields stabilise, the pair's move up would lose its second engine.