ING maintains a bearish outlook on the Canadian dollar

The Canadian dollar has emerged as the second-worst performing G10 currency in August, largely due to Canada reporting its largest ever current account deficit in Q2, driven by declining exports, and an anticipated 0.7% annualized Q2 GDP contraction. ING analysts are bearish on the CAD, citing deteriorating economic prospects, and project potential Bank of Canada rate cuts as early as September or October, significantly sooner than current market expectations, with another cut foreseen in 2026 to a terminal rate of 2.25%.

Analysis

The Canadian dollar (CAD) is under significant pressure, ranking as the second-worst performing G10 currency in August due to deteriorating domestic economic fundamentals. The primary drivers for this weakness are a record-high current account deficit for the second quarter, exacerbated by declining exports to the United States, and market expectations for a 0.7% annualized contraction in Q2 GDP. Based on this outlook, analysts at ING have adopted a bearish stance on the CAD, particularly against European and other commodity currencies. A key point of divergence exists between market pricing and ING's forecast regarding the Bank of Canada's (BoC) monetary policy; while markets anticipate a rate cut in December, ING projects a high probability of easing as early as September or October. This view is part of a longer-term projection that sees another rate cut in 2026 and a terminal rate of 2.25%. Notably, even ING's generally bearish outlook on the U.S. dollar is not expected to support the loonie, which is forecast to underperform its G10 peers due to Canada-specific economic challenges.

Key Decisions for Investors

• Investors should consider maintaining or initiating bearish positions on the Canadian dollar, particularly through currency pairs against European or other commodity-backed currencies, given the negative macroeconomic data and analyst outlook.
• Monitor Bank of Canada communications and upcoming economic data closely, as any confirmation of an economic contraction or dovish pivot could validate ING's forecast for rate cuts as early as September, creating a catalyst for further CAD weakness.
• Positions should be managed with an awareness that a broad-based, sharp decline in the U.S. dollar remains a primary risk that could provide temporary support to the CAD, despite its weak fundamentals.
• The divergence between market pricing for a December BoC rate cut and ING's forecast for a potential September/October cut presents a potential trading opportunity for those positioned for earlier monetary easing.