USD/CAD to plummet below 1.25 in fall – ING

Canadian elections, GDP decline and speculation about a more cautious Bank of Canada are among the factors that could weigh on the loonie. Nonetheless, economists at ING still expect the USD/CAD pair to slide below the 1.25 level in fall.

Domestic drivers now less supportive for the loonie

“The Canadian economy surprisingly contracted in 2Q, showing a deeper impact of the covid wave. Meanwhile, the snap elections set for 20 September are adding some uncertainty as PM Trudeau’s Liberal Party may not secure a full parliament majority.” 

“Markets are starting to speculate that the BoC will turn more cautious on policy normalisation. We think much will depend on incoming jobs data: should we see a consolidation in employment gains, and adding a 3.7% inflation, we think the BoC will stay on track to end QE by year-end and start hiking in 2H22.”

“Despite less supportive domestic drivers at the moment, we still favour USD/CAD below 1.25 in fall, as CAD retains some rate attractiveness and can benefit from fresh search for carry.”