USD/CAD can drop to the 1.20/23 area later this year – ING

The Bank of Canada (BoC) hiked by 50bps in April while announcing that QT will commence on 25 April. A strong outlook for growth is heightening concerns that inflation is becoming embedded with more large rate hikes on their way. This should be a supportive environment for the Canadian dollar, according to economists at ING.

Another 50bp in June looks likely

“The BoC has raised its policy rate by 50bp to 1%, in line with expectations, and will cease buying government bonds on 25 April.”

“CPI is now expected to average 6% through the first half of the year and not get consistently back to the 2% target until 2024. Furthermore, the BoC remains upbeat on growth with GDP forecasts of 4.25% in 2022, 3.25% in 2023, and 2.25% in 2024 with excess demand, a tight labour market, and rising wage growth underpinning activity. Given this situation, the statement talks of the risks of inflation becoming embedded and inflation expectations unanchored with an acknowledgement that ‘interest rates will need to rise further’. We look for another 50bp hike on 1 June with the policy rate set to hit 2.75% before year-end.” 

“Bullish BoC statement and its relatively aggressive balance sheet run-off should continue to position the Canadian dollar as an out-performer – or one of the currencies best positioned to withstand what should prove a strong, Fed-powered US dollar this summer.”

“We suspect any USD/CAD move over 1.27 should prove short-lived and that USD/CAD can even drive to the 1.20/23 area later this year. And given the more severe challenges faced in Europe, EUR/CAD can work its way to the 1.32 area.”