Canadian Dollar: Rate gap and USMCA risks cap Loonie – ING

ING’s Francesco Pesole notes that the Canadian Dollar remains a G10 laggard despite a pause, with short‑term rate differentials and global equities driving USD/CAD. While de‑escalation in the Middle East and better risk sentiment could push USD/CAD lower, Canadian inflation and labour data argue against a hawkish Bank of Canada, and USMCA renegotiation risks keep a risk premium embedded in ING’s forecasts.

Relative rates and trade risks weigh

"The Canadian dollar took a breather today, but remains a key laggard in the G10 in May."

"In our short-term fair value model, global equities and short‑term rate differentials are doing the heavy lifting in driving the pair."

"Further de‑escalation and improved risk sentiment would likely push USD/CAD lower, but relative rates continue to provide an important offset."

"Canadian inflation and labour market dynamics argue against any near‑term hawkish shift from the BoC, and markets remain more comfortable pricing out BoC tightening than Fed tightening."

"In our baseline scenario – which is rather optimistic on Middle East developments – we have USD/CAD trading back to 1.37 by the end of June and 1.36 by the end of the third quarter."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)