USD/CAD Market Update

Current Level: Mid-1.40s (24hr range 1.4038 to 1.4106)

USD/CAD is trading at 1.4058 this morning, 49 points below Monday's 1.4107 close, after a 1.4038 to 1.4106 range. The low is a fresh low for the month and the third consecutive session of CAD gains. Three supports for the Canadian dollar landed at once: Albertans voted decisively to remain in Canada, crude closed at its highest level since May, and the market's pricing for a Bank of Canada hike next week moved sharply higher. CAD is outperforming nearly the entire G10 basket, per CIBC.

Market Overview:

Risk sentiment is cautious this morning, per CIBC, with equity indices mostly lower as concerns about the scale of AI infrastructure spending return. The Nasdaq is down close to 1% and the South Korean KOSPI fell 3.7%, with South Korea now acting as one of the clearer barometers of the AI trade given its exposure to the large memory manufacturers. Global bond yields are slightly lower as fragile sentiment bids up haven demand. The notable detail for FX is that the US dollar is not benefiting. The dollar is down 0.2% and weaker across the G10 despite the risk-off move in technology, which is the same pattern that held through last week's selloff. Attention now shifts to earnings, where the burden of proof on AI capital spending has moved from the bears to the bulls.

Alberta Referendum Removes a CAD Tail Risk:

With roughly one million votes counted, about 76% of Albertans voted to remain part of Canada, per CIBC. The question would have launched a binding referendum on beginning a separation process. The result came in close to what polling had indicated, and there was little evidence that a risk discount had been built into CAD ahead of the vote, so the move this morning is less a repricing than the removal of a tail risk that could have sat on the currency into year end. The practical effect for hedgers is that one source of idiosyncratic CAD downside is now off the table, which leaves next week's two central bank decisions as the dominant near-term driver.

Oil at Five Month Highs:

Brent settled at 109.86 US dollars per barrel on Monday, its highest close since May 19, and WTI settled at 101.41 US dollars, its highest since September 17. Both are trading near those levels this morning. Reuters, citing Kpler data, counted at least 18 tanker attacks over the past two weeks, and the risk premium is concentrated in Strait of Hormuz transit rather than in current production losses. The US Energy Secretary put crude flows at roughly 80% of prewar levels, with refined product shipments still restricted. On the supply response, the International Energy Agency agreed to release more than 20 million barrels of fuel and the US has invited proposals to exchange up to 17 million barrels from the Strategic Petroleum Reserve. CIBC's read is that oil above 100 US dollars changes the conversation for Canada, and that the longer it holds there the stronger the case becomes for another investment cycle in the oil sands. That is a medium-term argument rather than a flow story, but it reinforces the terms of trade support CAD is getting today.

Canadian Data/Outlook:

CIBC's central bank watch this morning puts the odds of a 25 basis point Bank of Canada hike on October 28 at 79%, with no cut priced, against 63% in the same table yesterday. The posted consensus for the overnight rate remains no change at 2.25%. That jump sits awkwardly against Monday's September CPI. Headline inflation accelerated to 3.1% year over year on a 27.8% annual rise in gasoline prices, but both core measures the Bank actually targets came in below consensus and below the prior month, with CPI-trim at 1.8% from 1.9% and CPI-median at 1.9% from 2.0%. CPI excluding energy was roughly 2.2%. Published bank commentary since the release has leaned the other way from the market, with TD Economics arguing the Bank can stay on hold for the balance of the year and others reading the softer core prints as removing the urgency to move. The counterargument sits in the three month annualized figures, where trim is near 2.6% and median near 2.7%, both above target, and in the risk that sustained energy prices start to spill into the core basket. The gap between a 79% market-implied hike and a split economist consensus is the main thing to watch into next Wednesday, because it means the decision carries a genuine two-way surprise for CAD rather than a one-sided risk.

Fed Watch:

CIBC's central bank watch puts the odds of a 25 basis point Federal Reserve hike on October 28 at 14%, with no cut priced, down marginally from 16% yesterday. The fed funds rate stands at 4.00% and markets have largely settled on a pause at that meeting. It is a quiet day on the US data front and the week's calendar is thin, with the October flash PMIs and Michigan consumer sentiment on Friday the only releases likely to draw attention. That leaves corporate earnings and the AI capital spending debate carrying the market this week. For USD/CAD the asymmetry matters: a Bank of Canada hike against a Fed on hold would narrow the rate differential further, and that narrowing is already a large part of what has taken the pair three cents lower this month.

Technical Picture:

Resistance: 1.4106 is this morning's high and the first level back. 1.4152 is the October 19 high and the better test of whether the downtrend has stalled.
Support: 1.4030 is the 50% retracement of the 1.3760 to 1.4300 move, and today's 1.4038 low is effectively a test of it. CIBC's FX team said on Monday that level would stay out of reach without a material increase in near-term Bank of Canada pricing, and that repricing is exactly what arrived. Below it, CIBC's strategists flag strong technical support around 1.4000.
Outlook: The pair has broken the 61.8% retracement at 1.4094 that it was sitting on yesterday and is now working on the 50% level. Since CIBC's model moved off a maximum long USD reading, USD/CAD has corrected close to three cents lower, and the dollar has clearly lost momentum while CAD and its peers gain ground. The counterweight remains positioning: real-money CAD shorts built through the rally and the market is increasingly offside to price action, which argues for a grind into the October 28 decisions rather than a clean break. A hold from the Bank of Canada against 79% priced is the scenario that would unwind the most of this move.

Week Ahead:

October 28 is the week that matters. The Bank of Canada and the Federal Reserve decide within hours of each other, with the Bank now carrying a 79% implied hike and the Fed effectively priced for a pause, and the ECB and Bank of Japan follow the next day alongside US GDP and core PCE. Clients with CAD exposure into month end should treat the 9:45am ET Bank of Canada release as the single largest scheduled risk event in the window, particularly given the gap between market pricing and economist consensus.

Other Notes:

• A South Korean data-centre operator fell 32% on its trading debut despite heavy IPO demand, per CIBC, and that weakness spilled back into the broader AI complex. CIBC notes credit markets are also flashing warning signs.
• The latest EIA weekly report showed US commercial crude stocks drew 8.6 million barrels to 415.6 million, roughly 3% below the five year seasonal average, which supports the current oil bid independently of the geopolitical premium.
• Canadian housing starts for September were released this morning at 8:30am ET and are not expected to move CAD.