USD/CAD Market Update

Current Level: Low-1.40s (24hr range 1.3998 to 1.4027)

USD/CAD opens the week effectively unchanged at 1.4015, holding the narrow band it has traded since Thursday after a steady grind lower from 1.4094 last Monday. The story into Wednesday is a two-sided central bank risk event: markets are priced for a Bank of Canada hike and a Fed hold on the same afternoon. Overnight risk sentiment is constructive despite a violent repricing in Brazilian assets following the weekend election result.

Market Overview:

Risk sentiment is positive this morning, with global equities trading higher after last week's selloff, per CIBC. The U.S. dollar is broadly firmer after losing ground last week, though CAD is modestly outperforming on the crosses on what CIBC characterizes as more positive Canada and U.S. trade headlines. Global bond yields are mixed as markets position for a week carrying the Fed, the Bank of Canada, the ECB and the Bank of Japan. For USD/CAD the net effect is compression rather than direction; the pair has not traded outside a 1.3968 to 1.4051 band since Wednesday.

Central Bank Double Header:

Both decisions land Wednesday. The Bank of Canada announces at 9:45am ET with a Monetary Policy Report and a press conference at 10:30am ET; the FOMC statement follows at 2:00pm ET with a press conference at 2:30pm ET. CIBC's central bank watch puts the odds of a 25 basis point Bank of Canada hike at 86% and the odds of a Fed hike at 10%, with zero probability of a cut at either meeting. That is the first time in this cycle the market has priced a Canadian tightening against a U.S. hold, and the spread is doing the work of holding CAD up. CIBC strategists caution that the risks are skewed toward a more hawkish Fed than Bank of Canada, and they look for USD/CAD to rebound toward the upper end of the 1.40 handle this week.

Brazil Election Repricing:

CIBC reports that Brazilian markets collapsed following a surprise Lula re-election, with the Ibovespa down 10% at the open and triggering a circuit breaker as investors repriced fiscal risk. USD/BRL gained more than 12%, which CIBC describes as its largest daily move since the early 1990s. CIBC strategists expect fiscal headlines to drive the currency from here, see scope for an overshoot toward 5.60 and 6.00 if fiscal concerns materially worsen, have raised their year end USD/BRL forecast to 5.30 to 5.40, and no longer expect further Brazilian central bank cuts this year. The read-through to CAD is limited to broad risk appetite; no contagion into G10 commodity currencies is visible in this morning's pricing.

Canadian Data/Outlook:

The repricing toward a hike has less to do with the data than with Governor Macklem's recent warning about broader and more persistent inflation risk, according to CIBC. CIBC's economics team has moved its call to an October hike but treats the decision as a coin toss, because core inflation remains tame. The accompanying language matters as much as the decision: CIBC's view is that if the Bank does not move this week it will do so in December. August GDP lands Friday at 8:30am ET, where CIBC looks for 0.2% growth, and the same team flags that momentum could fade into year end as tariffs and trade uncertainty bite.

Fed Watch:

Markets expect no change to the federal funds rate at 4.00% on Wednesday, with CIBC's table showing a 10% probability of a 25 basis point hike and 0% probability of a cut. CIBC's economics team thinks the odds of a hike are higher than markets are pricing, but notes several Fed officials have signalled they would rather wait until December. The data is not giving the committee a reason to declare victory: CIBC expects Q3 GDP growth of 2.8% in Thursday's advance release and looks for core PCE to accelerate to 3.2% year over year. No cuts are priced at any meeting through year end, and a pause Wednesday keeps December live in both directions.

Technical Picture:

Resistance: 1.4027 is this morning's high and the first level to clear; 1.4051 marks last Thursday's high and the top of the four session range. Above that, 1.4083 is the October 21 high.
Support: 1.3998 is today's low and the first defence of the 1.4000 handle; 1.3968 was Friday's low and the only sub-1.40 print in the last five sessions.
Outlook: A 30 pip range on the session and an 83 pip range over four sessions says positioning is flat into Wednesday. The decision pair is the catalyst: a Bank of Canada hike delivered as priced likely needs hawkish language to push through 1.3968, while a hold opens 1.4051 and then 1.4083 quickly.

Week Ahead:

Wednesday is the week. Hedgers with CAD exposure inside the next five sessions are carrying event risk on both legs of the pair at the same time, and the two decisions are roughly four hours apart rather than offsetting across days. Thursday's U.S. GDP and core PCE pair then sets the December tone, and the following Friday brings employment on both sides of the border.

Other Notes:

• Gold briefly broke below US$4,000 and retested its June low as higher yields weighed, per CIBC, leaving the metal testing a key technical support area.
• Global bond yields are mixed ahead of the central bank meetings, and North American equities are higher this morning after last week's decline.
• CAD is outperforming modestly on the crosses, so the flat USD/CAD print understates relative Canadian strength this morning.