USD/CAD: Keeping risk premium on for longer - ING

While a Bank of Canada hold is widely expected, it's the looming US-Canada trade tensions and the outcome of Canada's late-April election that may shape the CAD's path. With US growth concerns persisting and new tariff risks on the horizon, USD/CAD remains vulnerable to volatilityING's FX analysts Francesco Pesole and Chris Turner note.

USD/CAD premium persists on soft US outlook

"We are releasing this note on the day the Bank of Canada announces policy, and we narrowly expect a hold. That does not have major implications for USD/CAD."

"The Fed-BoC gap has only moved around 20bp in favour of CAD in April, which is not enough to justify USD/CAD below 1.40. But our view is that USD will continue discounting soft growth expectations for longer, which can justify the USD risk premium."

"The direction of the US-Canada trade relationship will be the main determinant of CAD moves ahead. Canada elects a new government at the end of April; Liberal leader Mark Carney is slightly ahead in the polls. Whoever wins promises to fight Trump on trade, and risks that new tariffs will be threatened ahead of very tricky USMCA renewal talks leave CAD at risk of corrections."