USD/CAD market update

Current Level: Mid-1.39s (24hr range 1.3930 to 1.4006)

USD/CAD is trading at 1.3952, down from 1.4011 at Tuesday's close, after a 1.3930 to 1.4006 range. That is a 59 point decline and the first move below 1.3950 in six sessions. The pair spent the last five days locked between 1.3942 and 1.4013, and 1.3950 held the downside on each attempt until this morning. The break came on a broad dollar move rather than anything domestic: the U.S. midterm result landed well to the Democratic side of expectations, and investors are unwinding positions built on continued fiscal expansion. Nothing has changed in the relative rate story that has set this pair through October, which is why the move is worth watching rather than chasing.

Market Overview:

Risk sentiment is mostly positive this morning, per CIBC, with equity futures higher and the U.S. dollar under pressure after the Democratic sweep. S&P 500 futures are up roughly 1.0% having reversed sharp overnight losses as election uncertainty cleared, per CIBC citing Yahoo Finance. Global bond yields are down slightly, with the U.S. 10 year falling to 4.92% as investors price in legislative gridlock, per CIBC. The dollar is posting its biggest single day decline in roughly two months and is lower against every major counterpart, per CIBC citing Bloomberg. Semiconductors are the exception to the equity rally, under pressure on the view that Democratic wins raise the odds of tighter scrutiny on data centre construction. For USD/CAD the channel is the familiar one. The result reaches this pair through the front end of the U.S. curve, not through anything Canadian.

Blue Wave Delivers the Downside Catalyst:

Democrats have taken control of both the House and the Senate, and by a wider margin than markets had positioned for. CIBC reports projections of 258 House seats against the 218 needed for a majority, and at least 54 Senate seats against the 51 required, including flips in traditionally Republican states such as Texas, South Carolina and Kansas. CIBC reads inflation and affordability as the main drivers of the result. This report has carried the view for two sessions that a sweep was largely priced and that the aftermath would matter more than the outcome; the scale of the margin is the part that was not priced, and that is what the dollar is repricing this morning. CIBC's read is that the result does not change its macro forecasts but does change the guardrails, pointing to less fiscal expansion, less upward pressure on bond yields and one fewer tailwind for the U.S. dollar. CIBC's strategists also flag a slower artificial intelligence buildout as a longer term dollar risk, on the argument that data centre investment has been a genuine support for U.S. growth. Two cautions are worth stating. First, currency markets have not historically repriced durably on midterm results. Second, a conclusive result removes uncertainty, which can put a floor under the dollar once the initial move is done, and CIBC's own framing is that gridlock is the market friendly version of this outcome.

Canadian Data/Outlook:

There is no Canadian data today. Thursday brings the federal budget and Friday brings the October Labour Force Survey at 8:30am ET, with consensus at 14,600 jobs after a 68,300 decline in September and the unemployment rate expected to hold at 6.5%. CIBC's strategists continue to cite stronger Canadian employment as a catalyst for further USD/CAD downside, which makes Friday the second half of the setup that produced this morning's break. CIBC's central bank watch now shows 53% odds of a 25 basis point increase at the December 9 Bank of Canada meeting, with no cut priced, up from 49% yesterday and 51% on Monday. The Bank raised its policy rate to 2.50% on October 28, its first increase since July 2023, and did so against two consecutive months of job losses, so a weak print on Friday would pull December pricing back toward a hold and take some of the support out of CAD. A strong print does the opposite. With December odds this close to even, Friday carries more weight than a single employment report usually would.

Fed Watch:

CIBC's central bank watch puts the odds of a 25 basis point hike at the December 9 FOMC meeting at 81%, with no cut priced, up from the 76% this report carried on Monday. Independent pricing is softer. CME Group's FedWatch tool was reading near 71% for a December hike earlier this week, per reporting on November 2, so the market is not as committed to that increase as CIBC's figure implies. The Committee held the target range at 3.75% to 4.00% on October 29 with two officials dissenting in favour of an immediate hike, which is the context for why December is priced as a hike rather than a hold. The election result works against that pricing at the margin, since less fiscal expansion means less inflationary pressure for the Fed to lean against, and the fall in the 10 year yield this morning is consistent with that reading. Friday's U.S. payrolls report at 8:30am ET is the next real input, with consensus at 65,000 jobs, the unemployment rate expected to hold at 4.2% and average hourly earnings forecast at 0.3% month over month after 0.1%.

Technical Picture:

Resistance: 1.4006 is the overnight high and the level the pair opened from before the result was clear. Above that, 1.4013 is Tuesday's high and the top of the five session range.
Support: 1.3930 is this morning's low and the lowest print since September 16. Below that, 1.3900 is the area CIBC's strategists have identified as the next objective.
Outlook: The 1.3950 floor that defined the last week of trading has gone, and the pair is now inside the 1.3920 to 1.3950 zone CIBC flagged as support in late October. A sustained move below 1.3930 opens 1.3900. On a reversal, 1.3950 becomes the first resistance, and a recovery through 1.4006 would mark the election reaction as a one day event rather than a trend.

Week Ahead:

Friday is the week's main event for this pair, with the Canadian and U.S. employment reports landing in the same half hour. Both feed December pricing on their respective sides of the border, and with the Bank of Canada near a coin toss and the Fed priced for a hike, the two prints can move the rate differential in either direction. Next Tuesday's U.S. CPI is the first test of whether the election result carries any read through to inflation expectations.

Other Notes:

• Oil is lower again this morning after President Trump said he has no immediate plans to launch strikes on Iran, per CIBC. That continues the unwind of war risk premium this report has tracked since Friday, and it works against CAD at the margin even as the dollar falls.
• Semiconductors are lagging the broader equity rally on the view that Democratic gains raise the odds of tighter restrictions on data centre development, per CIBC.
• CIBC notes that U.S. equities have averaged gains of more than 16% in the twelve months following a midterm election since 1962, per Bloomberg, and have not been lower six or twelve months later in any instance since 1950. CIBC's own caution is that trading on politics is usually a losing strategy.