USD/CAD Market Update

Current Level: Low-1.40s (24hr range 1.4009 to 1.4036)

USD/CAD is trading at 1.4030 this morning, 18 points above Monday's 1.4012 close, after a 1.4009 to 1.4036 range. The pair has stayed between 1.3968 and 1.4057 since Thursday, and the range so far today is just 27 points. Most markets are little changed as investors wait for the Bank of Canada and the Federal Reserve tomorrow. Equities are the exception, extending Monday's rally after Anthropic's IPO filing revived interest in the AI trade.

Market Overview:

Risk sentiment is firmer this morning, per CIBC, with equities higher and global bond yields mixed as traders avoid large positions ahead of the decisions. The U.S. dollar is slightly firmer, with the DXY above 102.20, and FXStreet reports gold struggling near 4,000 US dollars as the dollar gains. CAD is mixed on the crosses. Oil has eased, but WTI remains above 100 US dollars, which continues to support CAD even as the pair edges higher. As it has through most of October, the rate outlook rather than risk appetite is setting the direction for USD/CAD.

Decision Day Setup:

The Bank of Canada announces at 9:45am ET tomorrow and the FOMC follows at 2:00pm ET. CIBC expects a 25 basis point hike from the Bank of Canada and a hold with hawkish guidance from the Fed, and warns the combination could produce uneven trading in USD/CAD. CIBC's strategists see scope for the pair to rise toward 1.4080, with the main risk a Fed that sounds more hawkish than markets expect. If the pair reaches that area, they would see it as an attractive level to sell USD. The other side of the trade is the Bank of Canada. With 81% of a hike priced, a hold would be the larger surprise, and it would weigh on CAD. The ECB and the Bank of Japan follow on Thursday, so the event risk extends beyond tomorrow.

AI Trade Recovers Ahead of Earnings:

The S&P 500 rose 0.7% on Monday to 7,676.77, led by chipmakers, after Anthropic filed for its IPO, per CNBC. CIBC reports equities are higher again this morning, with the S&P 500 up about half a percent and moving back toward its record high. CIBC's read is that the filing showed revenue growing well ahead of compute costs, which eased some of the concern behind last week's selloff about whether AI spending earns an adequate return. CIBC also points to the size of the company's reported net loss as a sign of how much capital is still going into the buildout. The next test comes from Alphabet and Microsoft, which report tomorrow, and Amazon on Thursday. For USD/CAD the effect is indirect, and firmer equities have not stopped the dollar from edging higher into the Fed.

Canadian Data/Outlook:

The Bank of Canada decision comes with a new Monetary Policy Report, and Governor Macklem's press conference follows at 10:30am ET. CIBC's central bank watch puts the odds of a 25 basis point hike to 2.50% at 81%, down from 86% on Monday, with no cut priced. CIBC's own call is for a hike. Economists are more divided than markets. A Reuters poll taken October 21 to 23 found 19 of 34 forecasters expect a hike, and 16 of 29 expect a second move to 2.75% by the end of March. The hawkish case rests on headline inflation, which rose to 3.1% in September, and on the risk that oil above 100 US dollars feeds into core prices. The case for patience rests on core measures that remain below 2%, with CPI-trim at 1.8% and CPI-median at 1.9%, and on a September jobs report that showed about 68,000 positions lost. BMO's view, as reported by Reuters, is that the Bank would prefer to move early rather than late. There is no Canadian data today, and August GDP follows on Friday at 8:30am ET.

Fed Watch:

The FOMC ends its two-day meeting tomorrow, with the statement at 2:00pm ET and Chair Warsh's press conference at 2:30pm ET. CME FedWatch puts the odds of a hold at about 90%, per CNBC, which matches CIBC's table showing a 10% chance of a 25 basis point hike and no chance of a cut. The target range stands at 3.75% to 4.00%. A Reuters poll taken October 16 to 20 found 94 of 100 economists expect no change this week, and all 100 expect a hike at the December 8 to 9 meeting. CNBC reports Warsh may signal further increases, and CIBC also expects a hawkish hold. Thursday's Q3 GDP and September core PCE data will then test that guidance.

Technical Picture:

Resistance: 1.4036 is this morning's high and the first level to clear. 1.4057 is Monday's high and the top of the range since Thursday. Above that, 1.4080 is CIBC's near-term upside target, just below the October 21 high at 1.4083.
Support: 1.4009 is this morning's low. 1.3998 is Monday's low and the first defence of the 1.4000 handle. Below it, 1.3968 is Friday's low, which FXStreet reports as the weakest level since mid-September.
Outlook: Four sessions inside an 89 point range leave the pair flat into the decisions. A Bank of Canada hike with hawkish language in the Monetary Policy Report would put 1.3968 back in play. A hold, or a Fed that leans harder toward December, opens 1.4057 and then CIBC's 1.4080 target, where CIBC would look to sell USD.

Week Ahead:

Tomorrow is the event that matters for CAD. The Bank of Canada and the Fed decide about four hours apart, on the same day as the UK Budget and earnings from Alphabet and Microsoft. Thursday brings U.S. GDP and core PCE alongside the ECB and the Bank of Japan, and August Canadian GDP closes the week on Friday. CIBC does not expect the quiet trading of recent sessions to last once the decisions land. Clients with CAD exposure over the next few sessions should be prepared for wider ranges than the past four days have shown.

Other Notes:

• WTI crude has eased but remains above 100 US dollars, per CIBC, as markets watch for signs of de-escalation in the conflict between the U.S. and Iran.
• The New Zealand dollar is outperforming ahead of tonight's RBNZ decision, per CIBC, with the calendar consensus a 25 basis point hike to 3.00%.
• The euro is lagging as French political and fiscal concerns stay in focus, per CIBC.