USD/CAD market update

Current Level: High-1.39s (24hr range 1.3950 to 1.3990)

USD/CAD is trading at 1.3979, up from 1.3971 at Friday's close, after a 1.3950 to 1.3990 range. The pair traded down to 1.3942 on Friday, the lowest level since September 16, and has spent this morning holding the top of the 1.3950 to 1.3920 support zone CIBC's strategists flagged last week. That is the bounce CIBC expected, and it has arrived in spite of a sharp drop in oil. CIBC describes CAD as caught between better risk sentiment, weaker oil and some signs of progress in U.S.-Canada trade talks. The pair is close to unchanged on the week and has now spent four sessions inside a 48 point band.

Market Overview:

Risk sentiment is stronger this morning, per CIBC, with equity futures rebounding as lower oil prices take pressure off markets after Friday's selloff. Global bond yields are slightly lower to start the week, with longer-dated bonds catching a bid ahead of tomorrow's elections and Friday's employment data. The U.S. dollar is slightly weaker against the G10 basket. For USD/CAD the notable feature is what did not happen. A 5% decline in crude would once have been a clear CAD negative, and the pair has barely moved. The rate outlook has driven this pair through October, as this report has tracked, and that remains the case heading into a week with three separate policy events on the calendar.

Oil Gives Back Its Geopolitical Premium:

WTI is down more than 5% and back below US$98 a barrel after reports that President Trump wants to allow more time for diplomacy with Iran, per CIBC citing Bloomberg. CIBC's view is that whether this represents genuine de-escalation or a bargaining tactic is open to debate, but that the market is buying it and the geopolitical premium is coming out of the price quickly. The move matters because of where crude started. CME Group noted on October 30 that WTI futures were sitting near multi-year highs heading into this week, so this is an unwind of a stretched position rather than a break in the trend. Elevated energy costs are the stated reason the Bank of Canada raised rates on October 28, which makes the direction of crude from here a live input into December pricing on both sides of the border. CIBC flags renewed escalation in the Persian Gulf as the main wildcard for the week.

Midterms and Treasury Refunding:

Tomorrow's U.S. midterm elections are the week's first event. CME Group notes that all 435 House seats and 35 Senate seats are contested and that options on E-mini S&P 500 futures are pricing elevated volatility around the result. CIBC reports that a Democratic sweep is widely expected and reads that outcome as bond friendly, since it would price more legislative gridlock into the back half of the current term. Wednesday brings the quarterly Treasury refunding announcement, where CIBC's strategists doubt there will be a meaningful increase in Treasury buybacks. Neither event is a direct USD/CAD driver, but both run through the front end of the U.S. curve, which is the channel that has been moving this pair. Currency markets have not historically repriced on midterm results, and nothing in the current setup argues for an exception unless the outcome is contested.

Canadian Data/Outlook:

There is no Canadian data today. The federal budget arrives Thursday, confirmed for November 5 by Trading Economics, and is the first of two domestic tests this week. CIBC's economics team does not expect a major deficit surprise against current Parliamentary Budget Officer estimates, and its view is that growth-focused tax changes would matter more for the Bank of Canada outlook than the headline deficit number. Friday's October Labour Force Survey at 8:30am ET is the more important release. CIBC's economists look for a 35,000 rebound in employment after two weak months, against consensus of 14,500 and a September print of 68,300 positions lost, with the unemployment rate expected to hold at 6.5%. CIBC's central bank watch shows 51% odds of a 25 basis point increase at the December 9 meeting, unchanged from Friday, with no cut priced. Trade is the other variable. Talks broke down in August after the U.S. changed its demands late, per The Western Producer, and President Trump has threatened 50% tariffs on all Canadian vehicles, auto parts and steel from January 1, per Advisor.ca. CIBC cites some signs of progress in the negotiations this morning and notes that a failure to improve that backdrop would complicate the Bank's path.

Fed Watch:

CIBC's central bank watch puts the odds of a 25 basis point hike at the December 9 meeting at 76%, with no cut priced, easing from the 80% CIBC reported on Friday. CIBC's economists continue to expect that December increase, and their view is that a firm jobs report or another leg higher in energy prices would only strengthen the case. The energy leg has moved the other way this morning, which is the first argument against December that this week has produced. Friday's payrolls report at 8:30am ET is the week's main event. CIBC's economics team expects 50,000 jobs added in October with unemployment holding at 4.2%, against consensus of 63,000 and a September gain of 29,000, and average hourly earnings are seen rising 0.3% after 0.1%. CIBC's read is that the labour market remains tight despite slower hiring, and that recent growth and inflation data continue to give the Fed room to focus on jobs. ISM Manufacturing for October lands today at 10:00am ET, with the services survey Wednesday and JOLTS job openings tomorrow, both at 10:00am ET. A heavy slate of Fed speakers and further technology earnings fill out the week.

Technical Picture:

Resistance: 1.3990 is this morning's high and the first level to clear. 1.3995 is Friday's high, with 1.4015 the October 29 high just above the 1.4000 handle. Beyond that, 1.4070 is the October 28 high, set before the Bank of Canada decision.
Support: 1.3950 is this morning's low and the top of the 1.3950 to 1.3920 zone CIBC's strategists identify as near-term support. 1.3942 is Friday's low and the weakest level since September 16. 1.3920 is the bottom of that zone, and 1.3914 is the September 16 low beneath it.
Outlook: The pair has now tested CIBC's support zone twice without breaking it, and the failure to extend lower on a 5% drop in oil shows how little crude is contributing here. Holding 1.3950 keeps the recovery case intact, with 1.3990 and then 1.4015 the levels to recover. CIBC's strategists see room for the pair to work toward 1.3900 this week, pointing to below-consensus U.S. payrolls, a stronger Canadian employment forecast and the possibility of a Democratic sweep as reasons for a softer U.S. dollar. That target sits below the support zone, so reaching it requires a break of 1.3920 and then the September 16 low at 1.3914. Clients with U.S. dollar payables have had two opportunities to buy in the low 1.39s and have not been given a third. Those with receivables should note that the week carries event risk in both directions, with the budget, the elections and two employment reports all landing inside four sessions.

Week Ahead:

Friday is the day that matters for this pair. Two employment reports at the same hour give the market a clean read on the relative labour backdrop, and December pricing in Canada sits close enough to a coin toss that a surprise in either direction will move the curve. Thursday's budget is a lower-probability mover, consistent with how Canadian budgets have traded historically, but substantive tax reform would be the exception worth watching for.

Other Notes:

• Equity futures are higher after Friday's technology selloff, per CIBC, which also notes that November has historically been one of the best months for equities in midterm years. The S&P 500 has gained 2.7% on average in a midterm November since 1950 against 1.0% in a normal November, and has been higher both six and twelve months after every midterm in that period, per CIBC citing Bloomberg.
• Longer-dated government bonds are catching a bid globally as investors position for the elections and Friday's data, per CIBC. A gridlock outcome tomorrow would reinforce that move.
• Realised volatility on USD/CAD remains close to the bottom of its recent range, consistent with four sessions inside a 48 point band. Clients covering known exposures with options are being quoted premiums that do not reflect the event risk sitting in Thursday and Friday.