Canadian Dollar Faces Further Downside as US-Canada Trade Tensions Escalate, ING Says

06:57 AM EDT, 08/27/2026 (MT Newswires) -- The Canadian dollar faces further downside as renewed US-Canada trade tensions weigh on growth prospects and prompt a dovish repricing of Bank of Canada expectations, according to ING Economics in a note. New US tariffs, which took effect on Saturday, come as Canada's economy was showing signs of improvement, with second-quarter gross domestic product expected to grow over 3% annualized and 181,100 jobs added in the past three months, said the bank in Wednesday's note. However, renewed uncertainty could weigh on investment, hiring and consumer demand, while higher tariffs may fuel inflation and squeeze margins. Markets now price 44 basis points of Bank of Canada tightening by April 2027, down from 63bps at the start of the week, wrote ING FX Strategist Francesco Pesole and Chief International Economist James Knightley in the note. The two predict the BoC to remain on hold through year-end. The loonie has remained relatively resilient, with USD/CAD up around 1% since negotiations collapsed and the Canadian dollar underperforming close peers by just 0.5% after accounting for the broader US dollar rally, added ING. This likely reflects expectations that tariff escalation will eventually lead back to negotiations, as in 2025. However, "a combination of dovish repricing in BoC rate expectations and a rising tariff risk premium should leave CAD underperforming most of its G10 peers," according to Pesole and Knightley. In the near term, USD/CAD could rise towards 1.3920-1.3950, with the pair modestly below short-term fair value near 1.390 and little tariff risk premium priced in, said the bank. Further out, ING's bearish US dollar view should cap gains, with forecasts of 1.39 at the end of the third quarter and 1.38 at the end of the year.