Canadian Dollar: BoC hold leaves risk of further losses against US Dollar - ING

ING analyst Francesco Pesole anticipates the Bank of Canada to maintain interest rates at 2.25%, despite a rise in headline Consumer Price Index (CPI) to 3.0% in July and solid economic growth. He cautions that trade tensions with the United States pose significant risks for Canada's economy, which could push the USD/CAD pair higher towards 1.400 this month.

The Bank of Canada is expected to keep rates on hold at 2.25% today, with a very low probability of an unanticipated rate hike. Despite strong employment data and a respectable 3.3% annualized growth in the second quarter, the latest escalation in the US-Canada trade and diplomatic spat has clouded these positive indicators. The central bank has mostly viewed tariffs as a dampening factor for activity and jobs, and even though Canada retaliated with tariffs that may raise prices, the low starting point for core inflation argues against a hawkish shift in monetary policy at this time.

Bank of Canada Governor Tiff Macklem is expected to stress that monetary policy is not a corrective tool for trade policies and will keep the door open for potential tightening if necessary. However, markets are pricing in 27 basis points of tightening by the January meeting, and may not find enough reasons to revise their expectations after today's meeting.

Pesole remains concerned about the near-term impact of trade chaos in North America on the Canadian dollar, even if tariffs are eventually resolved. The implications for the Canadian economy could be far-reaching, affecting business spending, hiring plans, and consumer behavior. As tensions in the Middle East escalate, the US Dollar gains strength on risk-aversion and hawkish Federal Reserve policy, causing the pair to underperform.

The US August jobs report and private sector employment data are also closely watched by market participants. Meanwhile, gold prices recover from early losses to a four-week low and trade above $4,320, while crude oil prices hit a fresh high since July 24, fueling inflation concerns and reinforcing expectations for a Fed rate hike in September.