USD/CAD set to hit 1.40 amid adverse risk environment – ING

USD/CAD has remained close to the highs recently. This Wednesday, the Bank of Canada is set to hike a further 75 bps next week. Any benefits to the Canadian dollar are still likely to be quite contained and short-lived, as external risks remain elevated, economists at ING report.

Still limited benefits from BoC hawkishness

“The OIS curve currently embeds 70 bps of tightening at the October meeting, meaning that a 75 bps hike should not be enough to drive CAD higher by itself. It’s possible however that a hawkish tone by Governor Tiff Macklem will trigger a repricing higher in peak rate expectations. This scenario could see CAD trade moderately stronger after the meeting, but the adverse risk environment continues to point to a higher USD/CAD from the current levels, with risks skewed to 1.40 being tested.”

“A return to 1.30 is still in our forecast for 2023 as CAD should benefit from low exposure to Russia and China, and may emerge as a market favourite to play pro-cyclical bets.”