As government bond yields of those countries, which were called peripheral countries, have risen substantially, namely, their prices have fallen sharply, assets of financial institutions in Europe that held a large amount of those government bonds have deteriorated significantly. Consequently, some financial institutions in Europe have lost market confidence and faced with an increase in funding costs or difficulties in funding themselves.
Quite often, it reflects changes in foreign demand for Canadian financial assets or changes in Canadian demand for foreign financial assets.2 For example, if investors develop a greater appetite to hold Canadian equities or bonds, this drives up the demand for our currency, which then tends to appreciate. The reverse also holds true.