USD/CAD market update

Current Level: Mid-1.39s (24hr range 1.3943 to 1.3984)

USD/CAD is trading at 1.3980 after a 1.3943 to 1.3984 range, effectively unchanged from Wednesday's 1.3979 close. The election driven move that carried the pair to 1.3929 on Wednesday, its lowest print since September 16, has been recovered in full. The dollar has stabilized after its largest single day decline in roughly two months, and no domestic catalyst has arrived to replace the one that faded. This report flagged two catalysts for USD/CAD downside earlier in the week. The first has now come and gone without follow through. The second arrives tomorrow at 8:30am ET.

Market Overview:

Risk sentiment is mostly positive this morning, per CIBC, although the AI complex continues to be sold hard beneath the surface. Global bond markets are quiet, with U.S. 2 year and 10 year yields little changed ahead of tomorrow's payrolls report, per CIBC. The U.S. dollar is little changed after Wednesday's selloff took part of the policy premium out of the currency, per CIBC. CIBC's strategists see room for the dollar index to move back toward its 50 day and 100 day moving averages at 101.03 and 100.73. For USD/CAD the relevant signal is the absence of follow through. A dollar negative catalyst that was two days old has not held, so the pair's direction from here depends on data rather than on politics.

Bank of England Hikes and Lifts Its Inflation Path:

The Bank of England raised Bank Rate by 25 basis points to 4.00% this morning, with eight of nine Monetary Policy Committee members backing the move and external member Catherine Mann voting for a 50 basis point increase, per CIBC citing Bloomberg. The decision itself was the consensus call. The inflation forecast was the surprise. The Bank now sees consumer price inflation peaking at 4.9% next year, against the 3.2% peak it published in July, per CIBC. Energy is the driver. U.K. household energy bills are expected to rise 25% in January, and the Bank's stated concern is that those costs eventually feed into wages and broader pricing, per CIBC. CIBC's strategy team expects one further 25 basis point increase in February to 4.25%, followed by an extended hold, and reads the hawkish stance as supportive for sterling, with EUR/GBP potentially testing the 2025 low near 0.8241. The read through to USD/CAD is indirect but real. A second major central bank moving further into tightening keeps the global rate backdrop pointed higher, and that is the same backdrop that has both the Bank of Canada and the Federal Reserve priced for December increases.

Rotation Out of the AI Trade:

Equity indices are holding up, but the composition underneath them has shifted sharply since the midterm result. Small caps and equal weight measures continue to outperform, with the equal weight S&P 500 reaching a new all time high, per CIBC citing Bloomberg. Semiconductors are the other side of that trade, down more than 3% in pre-market trading. The weakness is global: Samsung and SK Hynix each fell more than 7% overnight, pushing the South Korean KOSPI to major support, per CIBC. CIBC's read is that money is not leaving the equity market, it is leaving the AI complex and moving into everything else. The currency channel is the one CIBC's strategists flagged on Wednesday. Data centre investment has been a genuine support for U.S. growth, so a slower buildout is a longer term dollar risk rather than a risk for today. None of this rotation has reached USD/CAD yet.

Canadian Data/Outlook:

There is no Canadian data today, and the federal budget is the domestic item on the calendar. Tomorrow 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 central bank watch holds the odds of a 25 basis point Bank of Canada increase on December 9 at 53%, with no cut priced, unchanged from Wednesday and up from 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. With December close to a coin toss, tomorrow's print is the largest single input into that pricing. A recovery in line with consensus keeps the hike live and supports CAD, while a third weak month would pull pricing back toward a hold and take support out of the currency. CIBC's strategists continue to cite stronger Canadian employment as the catalyst for further USD/CAD downside.

Fed Watch:

CIBC's central bank watch puts the odds of a 25 basis point hike at the December 9 FOMC meeting at 83%, with no cut priced, up from 81% on Wednesday and 76% on Monday. Independent pricing has been softer. CME Group's FedWatch tool was reading near 71% for a December hike per reporting dated November 2, and no fresher independent reading was available this morning, so the gap between the two is best read as a measure of how firmly that hike is held rather than as a contradiction. The Committee held the target range at 3.75% to 4.00% on October 29 with two officials dissenting in favour of an immediate increase, which is the context for December being priced as a hike rather than a hold. Tomorrow's payrolls report at 8:30am ET is the next real input, with consensus at 65,000 jobs after 29,000, the unemployment rate expected to hold at 4.2% and average hourly earnings forecast at 0.3% month over month after 0.1%. A firm earnings print hardens December pricing. A miss on the headline softens it.

Technical Picture:

Resistance: 1.3984 is today's high and the top of the recovery from Wednesday's low. Above that, 1.4016 is Wednesday's high and the ceiling that has capped the pair since Monday.
Support: 1.3943 is today's low. Below that, 1.3929 is Wednesday's low and the lowest print since September 16. CIBC's strategists identify the 200 day moving average at 1.3896 as the next objective below that.
Outlook: The pair has spent five sessions between 1.3929 and 1.4016 and sits in the middle of that band. The 1.3950 level that acted as a floor through late October broke on Wednesday and has since been recovered, which makes it a pivot rather than a floor. Tomorrow's data is a more likely source of a break than anything in today's session. A sustained move below 1.3929 opens 1.3896, while a close above 1.4016 would put the election reaction behind the market entirely.

Week Ahead:

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

Other Notes:

• Gold is trading above US$4,100 per ounce and extending its post-election rally, supported by lower yields and a softer dollar, per CIBC citing Bloomberg. CIBC's read is that gold is beginning to function as a hedge against the AI trade rather than only against inflation.
• Today's Bank of England decision was the week's only scheduled major central bank event. The next decisions on both sides of this pair fall on the same day, December 9, when the Bank of Canada and the FOMC both meet. That makes every data point between now and then a direct input into two live pricing debates at once.