Canadian Dollar: BoC hold leaves risk of further losses against US Dollar - ING

ING’s Francesco Pesole expects the Bank of Canada to keep rates on hold at 2.25%, seeing very low risk of a surprise hike despite firmer headline Consumer Price Index (CPI) and solid growth. He warns trade tensions with the US pose deep risks for Canada and, combined with a bullish Dollar view, sees USD/CAD potentially extending higher toward 1.400 this month.

BoC steady as trade risks loom

"The Bank of Canada is widely expected to keep rates on hold at 2.25% today. We see a very low risk of a surprise hike. While headline CPI rose back to 3.0% in July, core inflation remains very well anchored around 1.9%-2.0%."

"A few strong jobs market reads and a respectable 3.3% annualised growth in 2Q have been clouded by the latest escalation in the US-Canada trade and diplomatic spat."

"The Bank of Canada has mostly looked at tariffs as a dampening factor for activity and jobs, and despite retaliatory tariffs from Canada, which can raise prices, the low starting point for core argues against jumping into a hawkish shift just yet."

"We suspect Governor Tiff Macklem will stress that monetary policy isn’t a corrective tool for trade policies, and keep the door open to some tightening if necessary."

"But markets are pricing in 27bp of tightening by the January meeting, and may not find too many reasons to revise those expectations after today’s meeting (especially since they are primarily borrowed from the USD curve)."

"As discussed in this note, we remain concerned about the near-term impact on CAD from the trade chaos in North America. The implications for the Canadian economy can be deep even if tariffs are eventually negotiated away, given the impact of trade uncertainty on business spending and hiring plans and well as consumers."

"Paired with our bullish call on USD, we see USD/CAD upside risks extending to 1.400 this month."