USD/CAD: BoC to support gradual strengthening to sub-1.20 levels – ING

The Bank of Canada reduced weekly bond purchases by another $1bn, to $2bn, as it delivered a broadly upbeat message on the recovery and left its forward guidance for 2H22 unchanged. Economists at ING think the BoC will end asset purchases by the end of 2021, allowing markets to speculate on an earlier than projected hike, and providing more support to the loonie.

Bank of Canada on track to end QE by year-end

“The BoCa reduced its weekly bond purchases by another $1bn, from $3bn to $2bn. Aside from noting that the virus dynamics remain a key element of uncertainty and revising the 2021 growth forecast marginally lower (by 0.5%), policymakers see a stronger growth in 2022 (4.2%, about 1% higher than in April).”

“Our view remains that considering the resilience of the Canadian economy, high vaccination rates, concerns about a booming housing market and government bonds that have dropped quite sharply since mid-May, the BoC remains well on track to end its QE programme by the end of the year. We are pencilling in the first rate hike in 2H22, but the risks are increasingly skewed towards an earlier move.”

“We think the market will remain attracted by CAD’s set of fundamentals: a) one of the most hawkish central banks in the developed space; b) a strong economic recovery and the highest share (70%) of people with at least one vaccine dose among major economies; and c) resilient oil prices even after the turbulent OPEC+ meeting.”

“We think that if our expectations that the BoC will end its asset-purchase programme by year-end proves correct, markets will be inclined to price in an earlier start of the hiking cycle in Canada. This should add to the already appealing carry profile of the loonie, which may prove a key factor driving some outperformance if the global recovery story consolidates and markets look to re-enter carry trades. We remain of the view that USD/CAD will trade below 1.20 by the end of 2021.”