ING Sees Further Dollar Decline as Trade Tensions Escalate

ING's analysts believe the Canadian dollar has further to fall due to escalating trade tensions between Canada and the United States. The bank points to dovish Bank of Canada repricing and a rising tariff risk premium as reasons for this bearish outlook.

The collapse of trade talks on August 22 led to 50% US tariffs on approximately $20 billion of Canadian goods, with further levies on Canadian autos, auto parts, and steel due from January 2027. Canada responded with dollar-for-dollar retaliatory tariffs worth $20 billion, including 50% duties on steel and aluminum set to take effect on September 8.

ING notes that USD/CAD has only risen by around 1% since talks broke down, and once the broader dollar rally is stripped out, CAD has underperformed its closest peers by just half a percentage point. The bank attributes this muted response to markets still following what it calls the 2025 playbook on US protectionism, where an initial escalation is assumed to eventually give way to negotiation.

However, ING's analysts see room for USD/CAD to extend gains towards the 1.3920-1.3950 area in the near term, as the pair trades modestly below its short-term fair value with no tariff risk premium currently priced in. Longer term, they expect the upside to be capped by broader dollar weakness, forecasting the Federal Reserve will deliver no hikes by year end and unwind an estimated 10 basis points of hawkish pricing around the September meeting and 26 basis points by December.