The Bank of Canada (BoC) surprised markets with a 25 bps rate hike. Economists at ING analyze USD/CAD outlook following the decision.

BoC tightening is back

The BoC has resumed interest rate increases after a five-month hiatus. Another hike looks likely in July, but we are wary about pushing for more aggressive action.

The BoC hike sent USD/CAD lower and the pair is now aiming at testing the November 2022 lows at 1.32/1.33. Below that, we’d be looking at 1.30 as the next key resistance level for the pair.

Our pre-BoC forecast for USD/CAD had 1.30 as an end-3Q target. We now think the chances of 1.30 being hit earlier this summer are quite elevated. 

Later in the year, a negative re-rating in US growth expectations and prospective Fed cuts late in 2023 can impact CAD negatively and we expect it to lag other procyclicals later in the year. But fresh BoC tightening means that USD/CAD may trade closer to 1.25 than 1.30 by year-end.