Loonie Sinks on Wide Yield Gap Ahead of Fed Rate Hike

The Canadian dollar experienced its fifth consecutive decline as investors anticipated a Federal Reserve rate hike and a softer Canadian housing market.

The loonie fell to 1.3915 per US dollar, despite oil prices reaching above $104, which typically supports the Canadian currency due to its significant export contribution from energy production.

The main driver behind the decline was interest rates: Canada's 2-year government bond yield dropped to 3.351%, sitting approximately 130 basis points below the comparable US yield, the widest gap in two weeks.

This increased spread makes it more attractive for investors to hold short-term US cash instruments rather than Canadian ones, leading to currency hedging that prioritizes this math.