USD/CAD Market Update

Current Level: Low-1.41s (24hr range 1.4071 to 1.4113)

USD/CAD is trading in the low-1.41s this morning near 1.4110, up from Friday's close of 1.4095 and back at the top of the range that has contained the pair since mid-July. The United States and Iran paused military strikes over the weekend, and the resulting slide in crude prices has removed the commodity support that carried the Canadian dollar through the middle of last week. The broad US dollar is lower on the improvement in risk appetite, but the Canadian dollar is not participating.

Market Overview:

Risk appetite is materially stronger this morning. CIBC reports equities supported and global bond yields lower as easing Middle East tensions offer relief ahead of Wednesday's Federal Reserve decision. US equity indices opened higher, with the Dow Jones Industrial Average up about 1%, the S&P 500 up 0.8% and the Nasdaq Composite up about 1%, according to Yahoo Finance. The US dollar is mostly lower against the G10 basket. CIBC notes that the Norwegian krone and the Canadian dollar are the only two currencies losing ground against the greenback, a clean read on how much of last week's Canadian dollar strength was borrowed from the oil market.

Oil Gives Back the War Premium:

Iran indicated it would suspend attacks for as long as the US pause in hostilities holds, and the truce has now run for a third consecutive day. Brent crude for September delivery fell 7.6% to near US$89 per barrel and West Texas Intermediate fell 6.7% to near US$83, according to CNBC. That unwinds a large part of a rally that had lifted crude close to 40% this month as supply risk spread from the Strait of Hormuz into the Red Sea. CIBC's read is that much of the geopolitical premium is being priced back out, and that some premium should remain until the situation is actually resolved. For USD/CAD the mechanics are straightforward: the crude bid that capped the topside last week has gone, and the pair has pushed back toward the highs.

Tech Earnings and the AI Trade:

Microsoft, Meta, Amazon and Apple all report this week, which CIBC frames as the biggest week of the summer for equities. The backdrop is unhelpful. Alphabet sold off hard last week after another large increase in capital spending pushed it into its first quarter of negative free cash flow since going public. Four of the largest technology companies are expected to present the same capital-spending-heavy plan. The question is not whether they are spending more, it is whether investors are still willing to pay for it. This matters beyond equities: technology sector wealth effects have supported US household consumption this year, and capital flows into US assets are tied to whether the sector keeps outperforming.

Canadian Data/Outlook:

The domestic calendar is effectively empty today and light all week. Friday's May GDP report is the only meaningful release, with consensus at 0.2% month over month against 0.5% prior; CIBC economists are below that at 0.1%. CIBC's view is that domestic data matters less than global events this week, and that the Canadian dollar will continue taking its cues from oil prices, Middle East developments and the US tape. CIBC strategists still expect USD/CAD to move lower over time, but they explicitly do not expect that over the coming days while energy prices correct and the market waits for the Federal Reserve. CIBC's central bank watch now shows a 6% implied probability of a 25 basis point hike at the September 9 Bank of Canada meeting, down sharply from 13% on Friday, with no cut priced. That drop is the oil move showing up in rate expectations.

Fed Watch:

The Federal Reserve announces Wednesday at 11:00 a.m. Pacific, followed by the press conference at 11:30 a.m. A hold at 3.75% is the consensus, and CIBC expects rates to stay steady, but the meeting carries more two-way risk than any decision in recent memory. CIBC's central bank watch shows a 34% implied probability of a 25 basis point hike, unchanged from Friday and still well above the 19% quoted two weeks ago, with no cut priced. CME FedWatch data as of July 25 put the probability of no change at 61.3%, with essentially all of the remainder assigned to a quarter point increase and nothing priced for a larger move. The hawkish drift has been driven by energy prices and by a labour market that is not cooperating with the easing case: initial jobless claims fell 22,000 to 187,000 for the week ended July 18, the lowest since 1969, and the unemployment rate sat at a one-year low of 4.2% in June, according to Reuters and CNN. With crude now retracing, the press conference tone matters more than the decision itself, and the market will be listening for anything that shapes the September meeting.

Technical Picture:

Resistance: 1.4116, Friday's high and the top of the recent range, caps the near term after today's 1.4113 session high stalled just below it. Above there, 1.4155, the July 14 high, marks the upper bound of the month's range.
Support: 1.4071, the session low, sits first, ahead of the 1.4000 psychological level, which CIBC notes has flipped from resistance into support, and the cluster at 1.3981, a Fibonacci retracement, and 1.3970, the 50-day moving average.
Outlook: The pair has spent eight sessions in a range roughly 60 pips wide and is testing the top of it again. A daily close above 1.4116 opens 1.4155; failure there keeps the consolidation intact. Wednesday's Federal Reserve decision is the most likely catalyst for a break, with the oil tape the secondary driver. Hedgers with near-term US dollar needs are being offered the best levels of the month.

Week Ahead:

Three central bank decisions, US GDP and core PCE, and four mega-cap earnings reports land inside roughly 72 hours. The Federal Reserve on Wednesday is the dominant event for USD/CAD, and Thursday's core PCE print is the sequel: a hotter reading would firm up late-year tightening expectations and support the US dollar, while clearer disinflation would do the reverse. Canadian data is a passenger this week.

Other Notes:

• Bank of England is expected to hold at 3.75% on Thursday, with the vote split the main interest. Growth and inflation have both undershot the Bank's forecasts, but commentary on energy prices could move the pound.
• Bank of Japan is expected to leave policy unchanged Friday alongside its Outlook Report. Traders are watching for signs the normalisation process could be accelerated later this year.
• The oil move cuts both ways for Canada. Lower crude removes support for the Canadian dollar, but it also removes an inflation impulse that had been pushing North American rate expectations higher, which is why the September Bank of Canada hike probability more than halved today.