USD/CAD Market Update

Current Level: High-1.39s (24hr range 1.3970 to 1.4002)

USD/CAD is trading at 1.3981, down from 1.3995 at yesterday's close, after a 1.3970 to 1.4002 range. The pair traded through the 1.4000 handle overnight and tested 1.3970 after this morning's U.S. data, the first time it has held below 1.4000 in more than five weeks. CAD is outperforming most major currencies as markets work through yesterday's Bank of Canada hike to 2.50% and the Federal Reserve's hold. The U.S. dollar is slightly softer following the Q3 GDP and September core PCE releases at 8:30am ET.

Market Overview:

Risk sentiment is weaker this morning, per CIBC, with technology shares leading equity markets lower. Global bond yields are mixed. Eurozone yields are down 4 to 5 basis points after the European Central Bank left policy unchanged, and U.S. front-end yields moved lower after the data rather than higher, which is the detail worth noting on a stronger than expected growth print. The U.S. dollar is slightly softer, and the euro fell to a fresh 17-month low following the ECB decision, per CIBC. CAD is the firmer side of this pair for the second session, driven by the rate outlook rather than by risk appetite. That has been the pattern all month, and the break of 1.4000 is the first time it has produced a decisive move.

U.S. Growth and Inflation:

U.S. real GDP grew at a 3.4% annualized rate in the third quarter, ahead of the 3.2% expected and up from 2.2% in the second, per the Bureau of Economic Analysis advance estimate. The Bureau attributed the increase to investment, consumer spending and government spending, partly offset by lower exports, with the datacentre buildout driving much of the business investment component and import growth for that equipment weighing on net trade. September core PCE rose 0.3% on the month, against 0.2% in August, and 3.1% from a year earlier, up from 3.0%, per Benzinga. The headline index rose 3.6% year over year. Personal income rose 0.2% in September while nominal spending rose 0.5%, which per CIBC points to households drawing further on savings as spending continues to outpace income. CIBC's read is that the economy keeps refusing to roll over, with the open question being how much of the growth is AI capital expenditure, and that the Fed should still raise rates 25 basis points in December. The market reaction was limited. Tightening expectations are close to where they sat before the release.

AI Trade Takes Another Hit:

Equity markets are mostly lower on another selloff in technology, with the Nasdaq down about 1.6%, per CIBC. Alphabet is down more than 12% after weaker search and advertising revenue renewed the question of whether AI spending will earn an adequate return. CIBC notes the company now carries more than one trillion U.S. dollars in future commitments and obligations and posted negative free cash flow for a second consecutive quarter. Microsoft was the exception on cloud results, though CIBC points out that it too is borrowing to help fund the buildout. This is the same equity and credit divergence this report flagged on Tuesday and Wednesday, and CIBC's view is that equities are now starting to price what credit markets have been signalling for a week. For USD/CAD the channel is indirect, through risk appetite and the U.S. growth story, and so far it has not stopped CAD from firming.

Canadian Data/Outlook:

There is no Canadian data today. The market is still repricing yesterday's decision, in which the Bank of Canada raised the overnight rate 25 basis points to 2.50% and paired it with a materially higher inflation track, citing the risk that elevated energy costs spread into broader prices. CIBC reads that meeting as hawkish, and the pricing has moved accordingly. CIBC's central bank watch now shows 51% odds of a second 25 basis point increase at the December 9 meeting, up from 40% on Wednesday, with no cut priced. CIBC's own economists continue to expect a hold in December followed by a move to 2.75% in January. August GDP lands tomorrow at 8:30am ET and is the first read on whether the economy supports the growth track the Bank upgraded this week. The October employment report follows on November 6, against a September print of roughly 68,300 positions lost and a 6.5% unemployment rate. A second weak labour reading would make the January move harder to defend, and it is the more important of the two releases for the December and January pricing.

Fed Watch:

The Federal Reserve left the target range at 3.75% to 4.00% yesterday, as expected. The vote was 10 to 2, with two policymakers preferring a 25 basis point increase, per CIBC. The statement upgraded its description of growth to strong from solid, kept inflation characterised as elevated, and said more information is needed before deciding the path forward. Chair Warsh declined to call financial conditions tight. CIBC's central bank watch this morning puts the odds of a 25 basis point hike at the December 9 meeting at 80%, with no cut priced, easing from the roughly 90% CIBC reported in the market immediately after yesterday's decision. CIBC's economists expect that December hike, and roughly three increases are priced over the next 12 months. Today's data did not change that arithmetic, which is the point: a 3.4% growth print that leaves pricing untouched tells you the December move was already the base case.

Technical Picture:

Resistance: 1.4002 is this morning's high and the 1.4000 handle the pair has just lost, making it the first level to reclaim. 1.4070 is Wednesday's high, set before the Bank of Canada decision. Above that, 1.4083 is the October 21 high and the top of the October range.
Support: 1.3970 is this morning's low and the near-term support CIBC's strategists identify. 1.3968 is the October 23 low, two points below it, and the weakest level the pair has traded in the five weeks of history this series covers. There is no reference below 1.3968 inside that window, so a break would put the pair at its lowest since mid-September with no recent level to lean on.
Outlook: The pair held a 1.3968 to 1.4083 band for seven sessions and has now spent a full session under 1.4000 for the first time in that stretch. CIBC's strategists call direction around 1.4000 difficult, but flag that a break below 1.3970 could open a more serious move lower. The structure is straightforward. 1.3968 holds and the band stands, with 1.4002 and then 1.4070 the levels to recover. It gives way and the move extends into territory with no October reference. Clients with CAD receivables should treat the 1.3968 area as the decision point rather than assume the range reasserts itself.

Week Ahead:

Tomorrow's Canadian GDP is the week's last domestic catalyst and it lands with the pair sitting on 1.3968. A firm print supports the Bank's upgraded track and the 51% December pricing, and would press that level. A soft one gives the January case a problem and is the clearer path back above 1.4000. Beyond tomorrow the calendar thins until November 6, when Canadian employment and U.S. payrolls arrive together at 8:30am ET and set the tone into the December 9 decisions. Expect the 1.3968 area to be tested more than once before then.

Other Notes:

• Gold is holding around the 4,000 U.S. dollar an ounce level, which CIBC describes as the technical line in the sand after the recent selloff, with higher real yields working against debasement and fiscal concerns.
• The ECB held and the euro fell to a 17-month low. President Lagarde warned that the energy shock carries upside risks to inflation and downside risks to growth, per CIBC, which leaves the bank with no straightforward options from here.
• North American clocks change on Sunday, November 1. Europe shifted on October 25, so the London and New York overlap stays one hour off its usual window until then.