ING Predicts Further Decline for Canadian Dollar Amid Tariff Uncertainty

ING has issued a bearish outlook for the Canadian dollar (CAD), suggesting that it has further room to fall as trade tensions with the United States escalate. The bank's analysis indicates that markets are currently operating under a 2025 playbook, which assumes that initial escalations in trade disputes will eventually lead to negotiations, thus downplaying the immediate impact on currency values.

Despite a recent period of relative resilience, CAD has only underperformed its G10 peers by about half a percentage point after stripping out broader dollar movements. However, ING believes that this muted reaction does not reflect the potential damage from the ongoing tariff disputes.

The recent imposition of 50% US tariffs on approximately $20 billion worth of Canadian goods, effective after trade talks collapsed on August 22, has raised concerns about the economic impact on Canada. Further tariffs on Canadian autos, auto parts, and steel are set to take effect from January 1, 2027. In response, Canada has announced matching retaliatory tariffs, also valued at $20 billion, which will include 50% duties on steel and aluminum starting September 8.

ING's strategists expect that the USD/CAD exchange rate could rise to between 1.3920 and 1.3950 in the near term, as the pair is currently trading below its short-term fair value. However, they caution that gains may be capped by broader dollar weakness, with expectations that the Federal Reserve will not raise rates by year-end.

Market expectations for Bank of Canada rate hikes have also diminished, with cumulative hike pricing dropping to 44 basis points by April 2027 from 63 basis points earlier in the week. ING anticipates one rate hike in the second quarter of 2027 and another in the fourth quarter, amid a backdrop of growth headwinds and limited corporate pricing power.

In light of these developments, ING believes that currencies such as the Australian dollar (AUD) and Norwegian krone (NOK) will outperform CAD, supported by stronger fundamentals and higher carry.