USD/CAD Market Update

Current Level: Upper-1.41s (24hr range 1.4155 to 1.4200)

USD/CAD is trading at 1.4172 this morning, down from Tuesday's 1.4191 close, after opening at 1.4193 and trading a 1.4155 to 1.4200 range. The pair has now been turned away at 1.4200 on two consecutive sessions. The catalyst was the August personal consumption expenditures report, which undershot expectations and pulled front end Treasury yields and the US dollar lower together. Canadian markets are closed today for the National Day for Truth and Reconciliation, so domestic liquidity is thin and the move is entirely a US dollar story.

Market Overview:

Risk appetite has improved. Equity futures gained on the inflation release and Treasury yields fell, reversing part of a selloff that had taken the 30 year above 5.6% on Tuesday, its highest since June 2002, and the 10 year to a fresh 2007 high near 5.3%, per CNBC. The 10 year was quoted at 5.221% and the 30 year at 5.553% this morning. The US dollar is softer across the majors. For USD/CAD the sequence that has governed the last two weeks has finally run in the other direction: cooler US inflation lowers the expected policy path, that compresses the US to Canada rate differential, and the Canadian dollar gets relief without needing any domestic help.

US Inflation Undershoots:

The Bureau of Economic Analysis reported core PCE rising 0.2% in August against consensus of 0.3%, with the annual rate at 3.0% against 3.3% expected, per Fox Business and CNBC. Headline PCE rose 0.3% on the month and 3.4% from a year earlier, below the 3.7% economists had forecast. The level is still well above the Federal Reserve's 2% target, so this is a deceleration rather than a resolution. What changed is the near term policy path. Traders priced in less chance of an October increase and pushed the next expected hike out to December, per CNBC. Tuesday's data pointed the same way, with job openings falling more than expected in August while hiring held up and layoffs stayed low.

Oil Continues to Retreat:

Brent settled at $102.59 a barrel on Tuesday, down 2.6% on the session, per OilPrice.com. Saudi Arabia has restored roughly 3.5 million barrels a day through the repaired East-West pipeline against a maximum capacity of 7 million, and satellite imagery confirms a substantial operational recovery at the Yanbu and Muajjiz terminals. CNBC reports crude exports recovering at Saudi Red Sea ports and the United States weighing a further release from its Strategic Petroleum Reserve. The read for this pair remains two sided. Cheaper crude removes a support for the Canadian dollar, but it also takes pressure off global inflation expectations and therefore off yields, and that second channel has been the larger one throughout this move.

Canadian Data/Outlook:

There is no Canadian release today and domestic markets are closed. Tuesday's GDP report showed output flat in July against consensus of +0.1% month over month, with the advance estimate for August pointing to a 0.2% gain. That report predates the latest round of American tariffs, so its signal value into the October 28 decision is limited. Overnight index swaps imply roughly a 59% probability of a Bank of Canada hike on October 28, per money.ca, with the overnight rate currently at 2.25%. Odds have swung widely over the past fortnight and the split among forecasters has not narrowed. The next domestic input that matters is the September employment report on October 9, which follows a 41.7K decline in the prior month.

Fed Watch:

CME FedWatch showed a 76.9% probability of a 25 basis point increase at the October 28 meeting as of Tuesday. That pricing has been cut materially by this morning's release, with money market reporting on Wednesday putting the odds of an October hike closer to 35% and the next full increase now expected in December. The probability of a cut at the October meeting remains at zero. New York Fed President John Williams added to the case for patience on Tuesday, saying there is no need for urgency following the September action and that the committee has time to gather more information. Friday's payrolls report is the next test, and the FOMC minutes on October 7 will show how broad the support for the September increase actually was.

Technical Picture:

Resistance: 1.4200 is the level that matters, having capped the pair on Monday at 1.4203 and again this morning at 1.4200. Above that, 1.4250 is the next reference.
Support: 1.4155 is this morning's low and the first line. Below it, 1.4137 from last week's session is the level that would signal the advance is unwinding rather than pausing.
Outlook: Two failures at 1.4200 on consecutive sessions, with the second one driven by a genuine repricing of the Fed path rather than by an oil headline, is the most credible sign of exhaustion this move has produced. That said, the pair has not yet broken 1.4155, and the advance from 1.3995 on September 18 has absorbed several such pauses. Treat a close below 1.4137 as the confirmation, not the 1.4200 rejection on its own.

Week Ahead:

Friday's payrolls report is the single event that decides whether this morning's repricing holds. A consensus print of 90K would be a clear step down from 162K, and combined with today's inflation data it would make an October hike difficult to justify. A strong number puts the October meeting back in play and, with it, the 1.4200 level. The October 9 Canadian employment report is the first domestic release with real bearing on the Bank of Canada decision later that month.

Other Notes:

• Euro area inflation jumped in September, with France at 3.4% year over year and Italy at 4.1%, both well above the 2% target and both above expectations, per Reuters. Christine Lagarde has argued that the surge has not yet produced second round effects and that a measured response remains appropriate, which is holding the euro's rally in check even as hike bets rise. The bloc wide flash estimate follows later this week.
• Sterling is firmer after the Office for National Statistics revised UK second quarter growth higher, to 1.4% year over year from an initial 1.2%, with output up 0.5% in the April to June period.
• The dollar is still set for its best month since June despite this morning's pullback, which is a useful reminder of how much ground the Canadian dollar has to recover before the September trend is genuinely broken.