The Loonie followed the US Dollar’s soft momentum over the past week and lost ground against most G10 peers. Economists at ING analyze CAD's outlook ahead of the Bank of Canada meeting on Wednesday.

CAD can bounce back against other pro-cyclicals

Since markets aren’t fully pricing in a July BoC hike (implied probability around 70% as of Friday), we could see a week of restrengthening for CAD, especially since the BoC may not have much interest in attaching a very dovish tone to a hike, and may well keep the door open for more tightening ahead.

USD’s recent softness looks hardly sustainable in an environment of higher US yields and hawkish Fed communication, so we do not see major downside potential for USD/CAD just yet. We favour, instead, some outperformance of the Loonie against other high-beta commodity currencies (such as the AUD and NZD) should our view for a BoC hike prove correct.