ING’s call sets up a bearish CAD view even after a period of relative currency resilience, arguing that markets are still applying a 2025 style playbook that assumes escalation gives way to negotiation and fades the initial FX reaction. That framework has kept CAD’s underperformance against G10 peers contained to around half a percentage point once the broader dollar move is stripped out, and has kept hedging costs muted relative to when the trade dispute first flared in December 2024. ING’s view diverges from that complacency, pointing to dovish Bank of Canada repricing and a rising tariff risk premium as reasons CAD should underperform peers such as AUD and NOK by a meaningful margin. The near term path for USD/CAD still points higher toward 1.3920-1.3950, though ING’s bearish dollar view, built on expectations for Fed cuts by year end, is expected to cap those gains into the fourth quarter.
ING thinks markets are underpricing the damage from the Canada tariff dispute and expects the loonie to keep losing ground against its G10 peers.
Summary:
- ING expects CAD to underperform most G10 peers in the coming months, citing dovish Bank of Canada repricing and a rising tariff risk premium
- USD/CAD has scope to move higher near term toward 1.3920-1.3950, but ING sees gains later capped by an expected dovish Fed
- Firm forecasts USD/CAD at 1.39 by the end of the third quarter and 1.38 by the end of the fourth
- 50% US tariffs on roughly $20bn of Canadian goods took effect after talks collapsed on 22 August, with 50% tariffs on Canadian autos, auto parts and steel due from 1 January 2027
- Canada has unveiled matching dollar-for-dollar retaliatory tariffs worth $20bn, including 50% levies on steel and aluminium, set to take effect on 8 September
- Markets have pared Bank of Canada hike pricing to 44bp cumulative by April 2027, down from 63bp at the start of the week; ING pencils in one hike in Q2 2027 and another in Q4 2027
- ING says CAD’s muted reaction so far reflects markets still assuming an eventual return to negotiations, an assumption it isn’t ready to bet against this time either
- The firm expects AUD and NOK to outperform CAD by a meaningful margin, supported by higher carry and stronger fundamentals
ING says the Canadian dollar has further room to fall as an escalating trade dispute with the United States weighs on growth and prompts markets to pare back expectations for Bank of Canada rate hikes, even as the currency has so far proven more resilient than the scale of the tariff shock might suggest.
The bank’s FX strategists argue that CAD will underperform most of its G10 peers in the coming months, pointing to a combination of dovish repricing in Bank of Canada rate expectations and a rising tariff risk premium. That view comes despite a relatively contained market reaction to the collapse of trade talks on 22 August, after which 50% US tariffs on roughly $20 billion of Canadian goods took effect, with a further 50% levy on Canadian autos, auto parts and steel due from 1 January 2027. Canada has responded with dollar-for-dollar retaliatory tariffs of its own worth $20 billion, including 50% duties on steel and aluminium, set to take effect on 8 September.
ING notes USD/CAD is up only around 1.0% since talks broke down, and once the broader dollar rally is stripped out, CAD has underperformed its closest peers by just half a percentage point, a muted response the bank attributes to markets still following what it calls the 2025 playbook on US protectionism, where an initial escalation is assumed to eventually give way to negotiation. Hedging costs for CAD, measured via the premium of implied over realised volatility, remain far more contained than when US-Canada trade tensions first flared in December 2024, reinforcing that markets are not yet pricing a durable breakdown.
The bank sees room for USD/CAD to extend gains toward the 1.3920-1.3950 area in the very near term, arguing the pair is trading modestly below its short-term fair value with no tariff risk premium currently priced in. Longer term, however, ING expects the upside to be capped by broader dollar weakness, forecasting the Federal Reserve will deliver no hikes by year end and unwind an estimated 10 basis points of hawkish pricing around the September meeting and 26 basis points by December. That leaves ING’s forecast at 1.39 for USD/CAD by the end of the third quarter and 1.38 by the end of the fourth.
On rates, ING says growth headwinds and a lack of corporate pricing power amid labour market slack are making economists more cautious on Bank of Canada tightening, with the market’s own pricing for cumulative hikes by April 2027 falling to 44 basis points from 63 basis points at the start of the week. The bank currently has one rate rise pencilled in for the second quarter of 2027 and a further hike in the fourth quarter, noting consensus is split between one and two hikes for the year overall. ING said it expects AUD and NOK, supported by higher carry and stronger underlying fundamentals, to outperform the Canadian dollar by a meaningful margin as the trade standoff continues.
This article was written by Eamonn Sheridan at investinglive.com.