Canadian Dollar: Why is upside against US Dollar limited despite BoC hike? - ING

Markets are pricing in excessive Bank of Canada (BoC) tightening beyond its neutral rate estimate, according to ING’s Francesco Pesole, who expects rates to peak at 2.75% and retains a year-end USD/CAD target of 1.420. The BoC’s 25bp increase to 2.50% is unlikely to be its final hike, with another rise expected in early 2027, although persistently high energy prices could bring it forward.

Will BoC rates peak near neutral?

"The Bank of Canada raised rates by 25bp to 2.50% yesterday, in line with market expectations. Stronger activity and growing concerns about cost pass-through suggest this is unlikely to be a one-and-done move, although policymakers stressed they will proceed carefully. We expect another 25bp hike in 1Q27, most likely in January, with the risk that persistently high energy prices bring that move forward to December."

"That said, we think markets are too hawkish in pricing around 90bp of tightening over the next 12 months. The BoC’s central estimate of neutral is around 2.75%, and while second-round inflation effects should emerge as firms pass higher costs to consumers, we expect them to remain contained, particularly when it comes to wage growth. Our base case therefore remains that rates peak at 2.75%."

"For CAD, oil remains the key swing factor. High prices can keep December hike expectations alive and support the currency, but we remain bearish on oil and think a correction would trigger dovish BoC repricing. We therefore see limited room for CAD gains from the domestic story alone and retain our year-end USD/CAD target of 1.420."

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