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Inflation in Canada Slows, Adding More Pressure to the Loonie

The Canadian dollar has lost ground against the US dollar over the past month, extending its year-to-date loss to 5.4%.

September 20, 2022
2 minutes
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The Canadian dollar continued its decline to new lows as softer-than-expected inflation pushed down local yields, further diminishing the currency's appeal.
The US dollar-loonie pair rose to 1.3354, its weakest level since November 2020, as inflation slowed to 7% in August. This has led investors to believe that the nation's central bank may not need to keep raising rates as aggressively. Just as markets brace for another jumbo hike from the Federal Reserve, this news may provide some relief.

The Canadian dollar has been weakening since mid-August, as surging US Treasury yields make the greenback a more attractive option. The US Treasury yield spread over its two-year Canadian counterpart widened to 23 basis points on Tuesday, the highest since August 2019. This trend is likely to continue in the near future, as the US economy continues to strengthen.

Bipan Rai, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce, expects the Canadian currency to weaken to 1.35 per US dollar over the near term. He attributes this to the increase in rate differentials, which he believes will lead to rates peaking at a lower level than in the US.

The Canadian dollar has lost ground against the US dollar over the past month, extending its year-to-date loss to 5.4%. However, it is still outperforming most of its Group-of-10 counterparts, only behind the Swiss Franc this year. The Canadian economy has been helped by higher prices for commodities and energy, and a scaling back of Covid restrictions. In fact, growth actually accelerated in the second quarter even as global recessionary concerns mounted.

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