ING Sees USD/CAD Rising to 1.3950 on Tariff Shock
0h ago|5 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
usd-cadcanadian-dollar
Fazen Markets Editorial Desk
Collective editorial team · methodology
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ING forecasts further losses for the Canadian dollar, arguing markets have failed to price in the full impact of a renewed trade war with the United States. The bank’s analysis, published on 27 August 2026, contends that the loonie’s relative resilience is misplaced and expects USD/CAD to advance toward the 1.3920-1.3950 range. ING attributes the currency’s contained underperformance, roughly half a percentage point against G10 peers, to investor complacency rooted in a 2025-era playbook where trade escalations typically de-escalate. The firm’s bearish outlook is driven by a combination of dovish repricing for the Bank of Canada and a rising tariff risk premium that should see CAD lag behind currencies like the Australian and Norwegian krone.
The current trade dispute escalated sharply on 22 August 2026 when talks between the US and Canada collapsed. This triggered immediate 50% US tariffs on approximately $20 billion of Canadian goods. A second wave of 50% tariffs on Canadian autos, auto parts, and steel is scheduled for 1 January 2027. Canada responded with matching retaliatory tariffs worth $20 billion, including 50% duties on steel and aluminium, set to take effect on 8 September 2026. This confrontation echoes the initial flare-up in December 2024, which saw a more pronounced market reaction and higher hedging costs. The fundamental shift now is the market's growing belief that a swift return to negotiations is less certain, challenging the previous pattern of escalation and de-escalation.
The broader macroeconomic backdrop includes shifting central bank expectations. Markets have significantly pared back bets on Bank of Canada tightening. Pricing for cumulative rate hikes by April 2027 has fallen to 44 basis points, down from 63 basis points at the start of the week. This repricing reflects concerns that trade-related growth headwinds and labour market slack will constrain the central bank's ability to hike. The catalyst for ING’s bearish call is the gap between this dovish shift in rate expectations and the Canadian dollar’s muted depreciation, suggesting a delayed recognition of fundamental deterioration.
Since the breakdown of trade talks on 22 August, the immediate market reaction has been measured. USD/CAD has risen approximately 1.0%. When adjusted for the broader US dollar rally, the Canadian dollar’s underperformance against its G10 peers is contained to around 0.5%. This is a fraction of the move seen during the initial dispute in late 2024. Hedging costs, measured by the premium of implied volatility over realised volatility, also remain subdued compared to that period.
ING’s specific near-term technical target for USD/CAD is the 1.3920-1.3950 zone. The bank’s quarterly forecasts project USD/CAD at 1.39 by the end of the third quarter and 1.38 by the end of the fourth quarter. The market's expectation for Bank of Canada policy has softened dramatically, with only 44 basis points of cumulative hikes priced in for the period ending April 2027. For comparison, the Australian dollar, which ING expects to outperform CAD, often trades with a higher carry profile due to its interest rate structure. The contrast in central bank expectations is a key differentiator. The retaliatory tariffs from Canada, valued at $20 billion, match the US action dollar-for-dollar, creating a direct economic drag.
| Metric | Pre-Breakdown (Start of Week) | Post-Breakdown (27 August) |
|---|---|---|
| BoC Hike Pricing (bps by Apr 2027) | 63 | 44 |
| CAD Underperformance vs G10 (ex-USD move) | ~0.0% | ~0.5% |
The primary second-order effect is sector-specific pressure on Canadian exporters, particularly in the automotive and basic materials industries facing direct tariffs. Companies reliant on cross-border supply chains will see margins compress. Conversely, US producers of steel and aluminium competing with Canadian imports may gain a temporary advantage from the protectionist measures. The Canadian equity market, especially the S&P/TSX Composite Index, which has a heavy weighting in resource and financial stocks, could underperform global peers if the trade dispute persists and dampens economic growth.
A key risk to ING’s thesis is the potential for a sudden diplomatic resolution, which would rapidly unwind the tariff risk premium and cause a sharp CAD rally. The market’s current positioning appears light on CAD shorts, as evidenced by muted hedging activity, suggesting traders are not yet fully convinced of a prolonged standoff. Flow data would need to show a sustained increase in hedging demand or outright short positioning to confirm ING’s bearish view is becoming consensus. The analysis of forex flows on fazen.markets often highlights how positioning drives currency moves.
The immediate catalyst is the implementation of Canada’s retaliatory tariffs on 8 September 2026. Market reaction to this event will test the hypothesis that the situation is more durable than previous disputes. The next Bank of Canada meeting on 9 September will be scrutinized for any change in tone regarding the economic impact of the tariffs. Key levels to watch for USD/CAD include near-term resistance at 1.3950 and support around the 1.3750 level, which held prior to the trade talk collapse.
Further out, the 1 January 2027 deadline for the second wave of US auto tariffs looms as a major potential volatility event. A break above 1.3950 in USD/CAD would open a path toward the 1.40 psychological level, especially if US economic data continues to outperform Canada’s. The divergence in Federal Reserve and Bank of Canada policy paths will be the dominant driver into the fourth quarter. Analysis of central bank divergence is a core topic covered in fazen.markets macro research.
The 2024 dispute saw a sharper initial market reaction, with higher implied volatility and a larger immediate drop in the Canadian dollar. The current reaction is more muted because markets are applying a learned behavior from 2025, where initial spikes in tension were followed by negotiation. The key difference now is the scale of the tariffs and the perceived lower likelihood of a quick resolution, which ING believes is not yet priced into the currency.
A weaker Canadian dollar typically boosts the Canadian-dollar value of foreign investments for domestic investors, particularly US equity holdings. However, it also increases the cost of imported goods, contributing to inflationary pressures. For sectors like domestic tourism, a weaker currency can be beneficial by making Canada a more attractive destination for foreign visitors, offsetting some of the negative trade impacts.
ING cites higher carry and stronger underlying fundamentals for the Australian and Norwegian currencies. Australia’s economy is more directly tied to Asian growth cycles, which are currently stable, and its central bank is not facing the same trade-induced headwinds. Norway’s krone is supported by strong energy exports and a sovereign wealth fund, providing fundamental insulation that the Canadian dollar currently lacks.
ING forecasts CAD weakness against a resilient USD driven by underpriced tariff risks and dovish BoC repricing.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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