USD/CAD Market Update

Current Level: Low-1.42s (24hr range 1.4192 to 1.4222)

USD/CAD is trading at 1.4210 this morning after a 1.4192 to 1.4222 range, essentially unchanged from Wednesday's 1.4214 close but 65 points below the 1.4275 level the pair held at this time yesterday. The inflation trade that drove Tuesday and Wednesday has been overwhelmed. September producer prices were hotter than any print in four years, and the market response was lower yields, a softer US dollar and a pair back at the bottom of its month-long range.

Market Overview:

Risk sentiment is shaky, per CIBC, with the selloff in AI-related stocks gathering steam and driving a flight to safety into bonds. The US 10 year yield is down 13bps to around 5.06% despite another round of strong US data. CIBC describes the US dollar as softer against the full G10 basket this morning as those yields retreat. For hedgers the key observation is that the direction of the dollar has flipped on the same inflation story that supported it two days ago. The driver is no longer rates, it is risk appetite, and CAD is trading as the high-beta currency in that setup rather than as a beneficiary of the yield move.

AI Unwind Drives the Bid for Bonds:

The AI trade is under immense pressure, per CIBC, with investors increasingly questioning how sustainable the debt-funded data centre buildout really is. CoreWeave, one of the largest providers of computing infrastructure to the sector, is at the centre of it. CIBC reports its shares down another 9% at the open after falling as much as 17% yesterday, and notes the more important signal is coming from credit, where CoreWeave bonds now yield roughly 15% and portions of its unsecured debt trade at distressed levels. The weakness is spreading to AI chips, equipment, cloud providers and debt backed by data centres tied to the company. CIBC's view is that this is the first real stress test of the AI boom. Whether it is a shakeout or something larger will not be clear for some time, but the immediate FX consequence is a classic risk-off rotation that leaves commodity currencies on the back foot even while the dollar itself weakens.

US Data Runs Hot, Yields Fall Anyway:

US producer prices rose 1.3% m/m in September, per CIBC, the fastest pace in more than four years, as higher energy costs continued to pass through the economy. Core PPI rose 0.7% m/m against 0.3% expected, taking the year-over-year rate to 5.0%, the hottest since early 2023. Retail sales also topped expectations, with the core measure up 0.9% m/m versus 0.6% consensus, although CIBC flags that the details were softer underneath: the control group that feeds directly into GDP rose just 0.1%. Both reports landed at 8:30am ET. CIBC's read is that the data are telling the Federal Reserve to stay hawkish while investors are telling a different story, and that for now the flight to safety is overpowering the inflation story in bonds. That is a description of positioning, not of an inflation problem that has gone away.

Canadian Data/Outlook:

There is no Canadian data today, so CAD is again trading as the passenger. September CPI on October 19 at 8:30am ET remains the domestic release that matters, arriving nine days before the Bank of Canada decision. The prior month printed at negative 0.1% m/m, with median CPI at 2.0% y/y and trimmed CPI at 1.9% y/y, both inside the target band. CIBC's central bank watch prices a 25bp Bank of Canada hike on October 28 at 28%, with a cut at 0%, down from 38% yesterday as the US repricing reversed. CIBC's strategists see the risk and reward on USD/CAD increasingly skewed to the downside over the medium term, and note their momentum model has moved off its maximum-long USD/CAD signal. On their work the pair has reversed lower 60% of the time over the following three months once that signal turns off. CAD buyers with unhedged exposure into year end should treat the current level as a reasonable entry rather than waiting for a retest of the highs.

Fed Watch:

CIBC's central bank watch now puts a 25bp Federal Reserve hike at the October 28 meeting at 28%, with a cut at 0%. That is a sharp unwind from 53% in yesterday's note and returns the market to roughly where it sat a week ago, despite a producer price report that was hotter than the consumer print that caused the original move. The front end has followed the long end lower. Federal Reserve Chair Warsh is scheduled to discuss the economic backdrop with the IMF managing director at the fund's annual meetings in Bangkok later today, and his comments will be parsed for how the Committee is leaning into the October 28 decision. Given how far hike odds have moved in two sessions, a hawkish tone there is the most direct upside risk to the US dollar this week.

Technical Picture:

Resistance: 1.4222, today's session high. Above that, 1.4281, Wednesday's high and the fourth failed test of the upper band this month, then 1.4300.
Support: 1.4192, today's low and the lowest print of the past week. Below that, 1.4154.
Outlook: The 1.42 to 1.43 range is intact and the pair has now travelled the full width of it in three sessions without resolving in either direction. The more useful signal is what the ceiling did under pressure. A hot core CPI print and a 35 point jump in Federal Reserve hike odds could not produce a close above 1.4300, and both of those inputs have since reversed. That shifts the burden of proof to the downside of the range. A daily close below 1.4192 would open 1.4154 and confirm the breakdown, and CAD sellers should have cover in place before that. A move back above 1.4281 would mean the risk-off bid in bonds has faded and the inflation trade is back on.

Week Ahead:

Canadian CPI on Monday is the only domestic input before the Bank of Canada meets, and with both central banks now carrying identical hike probabilities, a Canadian surprise in either direction moves the rate differential directly. The two October 28 decisions land on the same day, which concentrates event risk into a single session at the end of the month and argues for having hedges set before the week of the meetings rather than through them.

Other Notes:

• Oil prices remain elevated, with WTI crude above US$96 per barrel as severe supply disruptions continue to dominate energy markets, per CIBC. That is a support for CAD that the currency is not currently collecting, given the risk backdrop.
• The 13bp fall in the US 10 year yield to around 5.06% came on a day of hot inflation data. CIBC is explicit that this is a flight-to-safety rally and not an inflation victory, and the distinction matters for anyone reading the yield move as a signal on the policy path.