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The Canadian dollar has risen 3.2% against the US dollar over the past month.The earlier than expected hawkish shift by the Bank of Canada has forced economists at ING to upgrade the profile for USD/CAD, and they now expect a move below 1.20 in the third quarter, with downside room – aided by a weak USD – extending to 1.16 by year-end.

A strong economic rebound in the US and dormant Federal Reserve, despite spikes in inflation, are an ideal combination for CAD

“We expect the market to keep rewarding currencies (like CAD) with less dovish central banks to the detriment of currencies (like USD) which have been left unprotected by their central banks and are now at the mercy of rising inflation.”

“A strong economic rebound in the US and dormant Federal Reserve, despite spikes in inflation, are an ideal combination for CAD, allowing the currency to benefit from improving demand from the US (20% of Canadian GDP comes from exports to the US) while still enjoying the monetary policy divergence with the BoC.”

“We expect USD/CAD to start trading sustainably below 1.20 by the third quarter and we target 1.16 in the fourth quarter.”

 

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