Loonie Slumps as Fed Rate Hike Intensifies USD Strength

The Canadian dollar suffered significant losses against major currencies in the week ending September 18. The USD/CAD exchange rate jumped to its highest level in a month, reaching 1.4005. This weakness was particularly notable as global central banks signaled diverging paths and commodity moves failed to support the loonie.

The Canadian dollar's underperformance stood out against all major currencies in our basket. The most significant move was against the US dollar, where USD/CAD surged from 1.3918 to 1.4005, representing a 0.6% increase for CAD. Loonie weakness also showed up against the euro, yen, and Swiss franc, while it held ground only against the Australian dollar.

The key drivers behind this weakness were the Fed rate hike, oil's limited support, and Canadian inflation remaining above target at 3%. The US Federal Reserve raised interest rates to 4.00% on September 16, intensifying the yield gap and making the greenback more attractive. Despite Brent crude being above $107, risk aversion and U.S. dollar strength offset any commodity tailwind for CAD.