USD/CAD Market Update

Current Level: Low-1.40s (24hr range 1.4038 to 1.4068)

USD/CAD is trading at 1.4046 this morning, 21 points below Tuesday's 1.4067 close, after a narrow 1.4038 to 1.4068 range. That is a fourth straight session of CAD gains and a second consecutive test of 1.4038, which sits just above the 1.4030 level the desk has been watching. The range has compressed to 30 points from 68 points yesterday and 81 points on Monday. There is no Canadian data today and none scheduled before next Wednesday, so the near-term question is no longer what drives CAD but whether the market is willing to add to a three cent move with two central bank decisions seven days out.

Market Overview:

Risk sentiment is firmer this morning, per CIBC, with equity indices mostly higher as strong technology earnings ease some of the recent concern around the AI trade. It is another quiet session on the data front outside the UK, leaving corporate results, geopolitics and the health of the AI trade to set the tone. The US dollar is slightly lower against the G10 basket and CIBC's read is that the recent rally continues to lose steam. The dollar index remains in a technical uptrend but is losing momentum, with CIBC arguing that Fed hawkishness may have peaked while other central banks are still playing catch-up. Global bond yields are broadly stable, with one clear exception: French government bonds continue to sell off as fiscal and political concerns intensify. CIBC reports the French 10 year yield has reached 5% for the first time since 2002.

AI Trade Finds Support in Earnings:

Results from SpaceX and Super Micro were strong enough to steady a trade that had been under pressure for most of the past week, per CIBC. The releases addressed the specific concern that had been driving the selloff, which is whether the scale of AI infrastructure spending can generate adequate returns. Attention now moves to Meta and Tesla after the close, where investors are looking for further evidence that the increase in capital expenditure is translating into earnings growth. CIBC's view is that the AI trade has signs of life but that earnings still need to do the heavy lifting. For FX the read-through is indirect but consistent with what held through last week: the dollar has not been the beneficiary of either direction in technology, which leaves rate differentials rather than risk appetite as the dominant driver for USD/CAD into next week.

UK Inflation Beats and the Pound Firms:

UK headline CPI rose 3.5% year over year in September against a 3.4% consensus and 3.1% in August, per the Office for National Statistics. Core CPI rose to 2.8% from 2.6%. Transport was the largest upward contributor, with motor fuel prices up 29.8% year over year, the fastest pace since August 2022. Sterling is firmer on the print, per CIBC. The composition matters for the wider inflation picture because the same energy pass-through is visible in Canada's September report, where gasoline drove headline to 3.1% while the Bank of Canada's core measures eased. The UK release lands a week before the October 28 Budget and ahead of a Bank of England decision on November 5, with the Bank's benchmark rate at 3.75%.

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 82%, with no cut priced. That is up from 79% yesterday and 63% on Monday, a 19 point move in implied hike pricing over three sessions with no new Canadian data in between. The posted consensus for the overnight rate remains no change at 2.25%. The gap between market pricing and economist consensus is the main thing to watch into next Wednesday and it has widened rather than closed. Monday's September CPI gave both sides material: headline accelerated to 3.1% year over year on a 27.8% annual rise in gasoline prices, while CPI-trim eased to 1.8% from 1.9% and CPI-median to 1.9% from 2.0%, both below consensus. The hawkish case rests on the three month annualized core figures, with trim near 2.6% and median near 2.7%, and on the risk that sustained energy prices spill into the core basket. CIBC's FX view is that there is little major domestic news driving CAD and that the key for the pair will be which of the two central banks delivers the more hawkish signal.

Fed Watch:

CIBC's central bank watch puts the odds of a 25 basis point Federal Reserve hike on October 28 at 16%, with no cut priced, up marginally from 14% yesterday. The fed funds rate stands at 4.00% and markets remain settled on a pause at that meeting. No December cut is priced. The US data calendar is empty today and thin for the balance of the week, with Friday's October flash PMIs and Michigan consumer sentiment the only releases likely to draw attention, so earnings carry the market. The asymmetry for USD/CAD is unchanged and is the core of the current move: a Bank of Canada hike against a Fed on hold would narrow the rate differential further, and that narrowing is most of what has taken the pair roughly three cents lower this month.

Technical Picture:

Resistance: 1.4068 is this morning's high and the first level back. 1.4106 is Tuesday's high and the upper end of the band CIBC's strategists expect to hold into next week.
Support: 1.4030 is the 50% retracement of the 1.3760 to 1.4300 move and has now turned back two consecutive sessions, with lows of 1.4038 on both. Below it, CIBC flags strong technical support around 1.4000.
Outlook: CIBC's technical read is that the pair reached the 50% retracement of the September to October rally and stalled as expected, and that a break from here should set the next direction. The pattern supports that: the pair has spent two sessions probing 1.4038 without closing through 1.4030, and the daily range has halved in the process. CIBC's strategists expect 1.4000 to 1.4100 to hold ahead of the two decisions. The counterweight to further CAD strength remains positioning, with real-money CAD shorts built through the September to October rally and the market increasingly offside to price action. A hold from the Bank of Canada against 82% priced is the scenario that would unwind the most of this move, and it is now a larger risk than it was on Monday.

Week Ahead:

October 28 remains the week that matters and the calendar has thickened since yesterday. The Bank of Canada and the Federal Reserve decide within hours of each other, and the UK Budget now lands the same morning. The ECB and Bank of Japan follow on the 29th 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, and the widening gap between 82% implied hike pricing and a consensus of no change means the decision carries genuine two-way risk for CAD rather than a one-sided outcome.

Other Notes:

• France's 10 year yield reached 5% for the first time since 2002, per CIBC, and the spread over Germany has widened to nearly 160 basis points, the widest in 15 years. The move is fiscal and political rather than a reaction to the European rate outlook, and the ECB decides on October 29.
• Oil is mixed this morning with no clear direction, per CIBC, after Brent and WTI closed Monday at five month highs. The geopolitical risk premium is intact but is no longer adding to it, which leaves the terms of trade support for CAD steady rather than building.
• The AUD is outperforming the G10 following hawkish Reserve Bank of Australia comments, per CIBC, with Australian CPI due next Tuesday. Sterling is the other outperformer on the inflation beat.