CAD: Post-BoC sell-off risks limited given the 1.0-1.5% ‘US tariff’ risk premium - ING

The Bank of Canada is currently caught between a rock and a hard place – with signs of a resilient domestic economy and higher inflationary dynamics offset by heightened US trade policy risks, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“USD/CAD has shifted its emphasis onto the latter this week; our model estimates suggest the rally up to 1.29-1.30 has been an overshoot of short-term fair value (1.2750-1.2850) and thus speculative due to the prospect of US tariffs on steel and aluminium imports (Canada’s US$12bn exposure is the largest in nominal terms). While such developments have seen investors scale back on their expectations for a May BoC rate hike (currently at a 35% probability), we note that the overall policy tightening expected in 2018 remains around 50bps (ie, 2 hikes). Given that CAD is trading with a 1.0-1.5% ‘US tariff’ risk premium, we think only a scenario where the BoC explicitly cites dovish risks to their policy outlook would justify $/CAD moving beyond 1.30.”