USD/CAD to dip towards 1.16 as BoC builds the case for higher rates – ING

The Bank of Canada left policy unchanged, but offered hints that we should expect further QE tapering soon with a rate hike firmly on the agenda for the second half of next year. In FX, this should translate into USD/CAD trading consistently below 1.20 in 2H21, in the view of economists at ING.

The BoC tightening path is set to provide more of a tailwind to the loonie

“The BoC hasn't provided any surprises, leaving the policy rate at 0.25% and keeping weekly QE asset purchases at C$3 B. They have also maintained their forward guidance that they will keep interest rates unchanged until excess capacity in the economy has been absorbed and inflation consistently hits 2%.” 

“With the economic outlook for the second half of the year undoubtedly brightening, the BoC remains on track to taper its asset purchases to C$2 B per week from July and conclude the QE programme around year-end.”

“We anticipate that the BoC will indeed start lifting interest rates in 4Q22 with the policy rate expected to end next year at 0.5% and 1.25% for end-2023.”

“The notion that the BoC remains a hawkish stand-out in G10 is set to continue providing support to the Canadian dollar, in our view. In particular, the diverging patterns in monetary policy in Canada and in the US should apply pressure on USD/CAD.”

“In line with our view that the BoC will continue to taper asset purchases in 2021 while not denting market confidence about a rate hike in 2022, we think the fundamentals for a break below 1.2000 are there, and we continue to expect USD/CAD to stay on a depreciating trend in 2H21 and touch 1.16 in 4Q21.”