Canadian Dollar Sinks as Tariff Fallout and Rate Gap Take Toll
The Canadian dollar has been in decline for over a month, with 12 out of its last 13 sessions moving against it. This trend began when Canada's counter-tariffs on US goods worth CAD $27.6 billion took effect on September 8. As a result, the USD/CAD exchange rate has risen to its highest level since mid-July, nearing 1.4150.
The interest rate differential is also playing a significant role in this trend. The Federal Reserve lifted its policy rate to 3.75-4.00% on September 16, while the Bank of Canada has held at 2.25% for seven meetings, most recently on September 2. This has left a yield gap of roughly 1.25 points between the two countries.
Despite Brent crude rising over 15% in September, the Canadian dollar has fallen. Historically, when the US-Canada yield spread widens past 100 basis points, the correlation between the Loonie and oil can drop from its usual 0.7 to near zero as interest rate policy takes precedence.
Experts recommend trading long on the USD/CAD pair in the coming weeks, targeting resistance levels at 1.4200 and 1.4250. They also caution against treating the Canadian dollar as a proxy for crude oil due to its broken relationship with Brent crude.