Canadian Dollar Weakens Against Major Currencies Amid Fed Rate Hike
The Canadian dollar experienced a notable decline against major currencies in the week ending September 18. The USD/CAD pair surged to its highest level in a month, reaching 1.4005. This underperformance was evident as global central banks signaled diverging paths and commodity moves failed to support the loonie.
The CAD fell against all top-traded currencies in our basket, with the most significant move being against the US dollar. The USD/CAD pair rose from 1.3918 to 1.4005, representing a decline of 0.6% for the Canadian dollar. Similarly, the loonie weakened against the euro, yen, and Swiss franc, while only holding ground against the Australian dollar.
The key drivers behind this weakness were the US Federal Reserve's rate hike to 4.00%, intensifying the yield gap and making the greenback more attractive. Despite oil prices rising above $107, risk aversion and US dollar strength offset any commodity tailwind for CAD. Canadian inflation stuck at 3% in August, but it was not enough to trigger a Bank of Canada move, leaving CAD exposed.
The USD/CAD pair's rise reflects the Fed-driven pressure on the Canadian dollar. The CAD/JPY pair rose by 1.6%, but this is actually due to yen weakness, not CAD strength.