Economic Outlook and Summary
September lived up to its reputation. The Fed raised rates for the first time since 2023, Treasury yields surged and the dollar found its swagger. The 10-year yield jumped from 4.75% to 5.27%, while the two-year rose about 55 basis points. The S&P 500 took the punishment and finished roughly flat, while the TSX lost 2.2%.
The Middle East remained the wild card. WTI topped $105 as supply disruptions pushed Brent above $108, before retreating as fears of a prolonged shortage eased. Iran later proposed a seven-day ceasefire tied to reopening the Strait of Hormuz. Trump rejected the offer but said talks would continue.
Tariffs were front and center. Canada's C$27.6 billion of counter-tariffs took effect September 8, followed by new US restrictions on Canadian goods like motorcycles, alcohol and some dairy products. The Trump-Xi summit also produced a US$30 billion reciprocal tariff reduction, handing China a win.
October brings a crowded calendar, including simultaneous BoC and Fed decisions on October 28, jobs and inflation data, third-quarter earnings and the November 3 US midterms. Volatility should remain firmly on the menu.
The USD and Federal Reserve
The US dollar spent September making up for August. DXY climbed from around 99.50 to 101.50 as a hawkish Fed, surging Treasury yields and a resilient US economy boosted the greenback.
On September 16, the FOMC raised rates 25bp to 4.00%, with Chair Kevin Warsh saying the Fed was "removing accommodation." The SEP put PCE inflation at 3.7% this year and 2.3% in 2027, while the median policy rate is projected at 4.1% at year-end in both years.
The data gave the Fed plenty of ammunition. Q2 GDP was revised to 2.2%, while August real consumer spending rebounded at a 6.8% annualized pace. The S&P Global composite PMI hit 58.4, its strongest since July 2021, and ADP reported 90,000 private-sector jobs in September. Core PCE rose just 0.2% in August, easing the annual rate to 3.0% from 3.3%, but inflation remains above target.
Then came the September payrolls report. Job growth slowed sharply, while unemployment and wages provided more evidence that the labour market is cooling. Markets slashed October hike odds to around 20% from 70% at the start of the week.
October's question is whether September was one and done.
The Canadian Dollar and Bank of Canada
The Bank of Canada held its overnight rate at 2.25% on September 2, its seventh consecutive hold, but the tone was firmer than the decision. Governor Tiff Macklem warned that "upside risks to inflation have increased, while new tariffs make growth prospects more uncertain." The loonie enjoyed that for about a week.
Then the Fed took the wheel. USDCAD bottomed near 1.3760 in the second week of September and rallied with barely a pause to 1.4237 on September 30. The CAD/US interest rate spread widened in the US's favour and that did most of the damage, along with a soft labour market (Canada shed 41,700 jobs in August, with unemployment steady at 6.4%), the tariff dispute and a sagging TSX. In loonie terms, the Canadian dollar slid from about 72.5 US cents to roughly 70.3 cents.
October will be an awkward month for the Canadian dollar. The Labour Force Survey on October 9 and CPI on October 19 will shape the Bank's October 28 decision and its accompanying Monetary Policy Report. Another weak jobs print would widen the policy gap with the Fed. A firm inflation number would keep Macklem's hawkish warning alive, although the Bank has little appetite to tighten into a softening labour market while tariffs bite.
Oil Prices
WTI took traders on a round trip in September. Prices climbed from the mid-$80s at the end of August to above $105 by September 15 as Middle East supply disruptions intensified and Brent pushed through $100. The rally then reversed as supply concerns eased, with WTI falling for three straight sessions from September 16 and sliding to the $89 area by September 29.
October's oil outlook once again hinges on the Strait of Hormuz. Iran's ceasefire offer was rejected, but the talks are not dead. A deal that reopens Hormuz could quickly strip out what is left of the risk premium, while fresh escalation could send WTI back above $100.
An Iranian official said Tehran is reviewing Washington's response to its seven-day proposal, while an IRGC adviser warned that a US ground attack would bring strikes against American vessels, bases and other targets. Oil traders have plenty to worry about.
Bank 2026-USD/CAD Q4 2027-USD/CAD Q1
Scotiabank* 1.3700 1.3600
BMO 1.3800 1.3700
CIBC 1.4100 1.3900
TD Bank 1.3900 1.3900
National Bank 1.3700 1.3500
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
