USD/CAD Market Update

Current Level: Upper-1.42s (24hr range 1.4197 to 1.4281)

USD/CAD is trading at 1.4275 this morning, up 58 points from Tuesday's 1.4217 close, after a 1.4197 to 1.4281 range. The catalyst flagged in yesterday's note has arrived. September US consumer prices came in above consensus on every underlying measure, the market repriced the Federal Reserve toward another hike this month, and the dollar is higher across the G10 basket. The pair ran to 1.4281 and stopped short of the 1.4300 level that has capped it all month.

Market Overview:

Risk sentiment is softer following the inflation release, per CIBC. Treasury yields jumped across the curve, led by the front end, with the US 2 year approaching 5% as traders repriced the policy path. Equity markets are lower, putting the S&P 500 on track for a third consecutive decline, although the index remains less than 1% below its all-time high. CIBC describes the US dollar as supported against the full G10 basket and now at its strongest level since early April. For hedgers the relevant point is that this is a rates-driven dollar move, not a Canada-specific one, and it has pushed the pair to the top of a range that has held for two weeks rather than through it.

US Inflation Reaccelerates:

Headline CPI rose 0.6% m/m in September, matching the 0.6% consensus and the largest monthly increase since April, per CIBC. The year-over-year rate climbed to 3.7% from 3.4%, a tick above the 3.6% expected. Gasoline accounted for more than half of the headline increase, with pump prices up 9.1% m/m. The more important detail sits underneath. Core CPI rose 0.3% m/m against 0.2% expected, holding the August pace, and the year-over-year core rate moved to 2.6% from 2.4% versus 2.5% consensus. CIBC notes both goods and services accelerated, which is the broadening that policymakers have said they need to avoid seeing. CIBC economists believe the core surprise is broad enough to convince most FOMC members to hike again later this month.

Canadian Data/Outlook:

There was no Canadian data today, so CAD traded as the passenger. The domestic calendar is quiet until September CPI on October 19, which arrives nine days before the Bank of Canada decision and is the release that matters for the near-term CAD path. The backdrop going in is soft. September employment fell 68,300 against consensus for a small gain, the second consecutive monthly decline, and the unemployment rate rose to 6.5%. CIBC's central bank watch now prices a 25bp Bank of Canada hike on October 28 at 38%, up from 28% a week ago, with the probability of a cut at 0%. That repricing is a function of the US print rather than anything domestic. CIBC's strategists remain constructive on CAD over the medium term but acknowledge that higher levels are in play near term while momentum favours the US dollar.

Fed Watch:

CIBC's central bank watch puts a 25bp Federal Reserve hike at the October 28 meeting at 53%, with a cut at 0%. That is a sharp move from 18% on October 9, and it is the single largest repricing of the Fed path this month. The front end of the Treasury curve has followed, with the 2 year approaching 5% from roughly 4.80% earlier in the week. Tomorrow's producer price report now carries more weight than usual given the surge in diesel prices and the pass-through to factory, logistics and freight costs. Federal Reserve Chair Warsh is also scheduled to speak tomorrow, and any comment on how the September print affects the Committee's confidence in the inflation path would move the front end again.

Technical Picture:

Resistance: 1.4281, today's session high and the fourth test of the upper band this month. Above that, 1.4300, a level CIBC notes the pair has repeatedly run into and failed to clear.
Support: 1.4197, today's low and the point from which the CPI rally began. Below that, 1.4154.
Outlook: The 1.42 to 1.43 range survived its biggest test. A hot core CPI print and a 35 point jump in Fed hike odds produced a 58 point rally that stopped 19 points short of the ceiling. That tells you how much US dollar strength is already in the price. A daily close above 1.4300 would confirm a breakout and open materially higher ground, and CAD buyers should have cover in place before that happens. Failure here keeps the range intact and makes Canadian CPI on October 19 the next decision point.

Week Ahead:

Tomorrow is the heavier of the two sessions. PPI and retail sales both land at 8:30am ET, giving the market a read on whether cost pressures are still building upstream and whether the consumer is absorbing them. A firm pair of prints would consolidate the hike pricing and put 1.4300 back in play immediately. The two October 28 decisions are the real event, and they now sit inside the hedging horizon for anything settling into month end.

Other Notes:

• WTI is trading back above US$95 a barrel on continued Middle East supply risk, per CIBC. Energy is now feeding directly into the inflation data rather than sitting alongside it, and the usual CAD support from higher crude is again not showing up in the pair.
• The US 2 year Treasury yield is approaching 5%, with the front end leading the selloff. The Canada 2 year was near 3.18% earlier in the week, so the policy spread that drives this pair has widened further against CAD.
• Equity weakness remains orderly. Three consecutive down sessions have taken less than 1% off the S&P 500 from its high, which is not the kind of risk-off that normally adds a safe haven bid to the dollar on top of the rates move.