Loonie Loses Ground as USD Strength and Risk Aversion Take Hold
The Canadian dollar experienced significant losses against major currencies in the week ending September 18. The USD/CAD pair surged to 1.4005, its highest level in a month, while other currencies such as the euro and yen also weakened against the loonie.
The underperformance of the CAD can be attributed to several factors. The U.S. Federal Reserve's decision to raise interest rates to 4.00% on September 16 intensified the yield gap, making the greenback more attractive. Additionally, despite oil prices reaching above $107, risk aversion and U.S. dollar strength offset any potential tailwind for CAD.
The Canadian inflation rate remained steady at 3%, which was not enough to trigger a response from the Bank of Canada. This lack of action left the CAD vulnerable to global flows and commodity moves. As a result, the loonie's biggest pain came from USD strength, with CAD/JPY's rise actually reflecting yen weakness rather than CAD strength.