Canadian Dollar's Trade Woes Outstrip Oil's Gains

Official White House Photo by Gabriel B Kotico.

The Canadian dollar lets an oil rally pass it by. Here's why.

A 30% rally in oil prices would normally light a fire under the petro-sensitive Canadian Dollar, but this time the currency has barely noticed.

"Even given oil's 30% rally since post-war lows, the Canadian dollar continues to show very little sensitivity," says Sarah Ying, FX Strategist at CIBC. "Against crosses, CAD performance has been mixed, with EUR/CAD down 0.73%, and GBP/CAD down 0.80% since the oil rally."

Those are modest moves against the scale of the crude advance (Brent is up 24% in July), and Ying reckons the explanation lies in what is really driving flows.

"We suspect then, that most of the move for the Canadian dollar remains tightly married to risk and the carry trade for now (CAD weaker). This may explain why it has been more stubborn to appreciate in spite of the recent rally in oil prices."

A currency trading on risk appetite rather than its terms of trade is a currency waiting for the next headline, and this week duly delivered one from Washington.

Above: Brent crude and CAD/GBP (lower panel), showing the CAD's reaction function to oil has gone AWOL.

Tariffs Cap the Recovery

U.S. President Donald Trump on Monday signed three proclamations imposing levies of up to 50% on a broad range of Canadian goods under Section 338 of the 1930 Tariff Act, with the duties set to take effect in 30 days.

"We expect trade uncertainty to keep USDCAD above 1.40 near term," says a note from TD Bank.

TD calculates the new Section 338 tariffs will impact roughly $20BN of Canadian exports when they take effect in 30 days, representing a small drag on Canadian GDP if implemented.

Above: CAD performance in 2026.

The measures that landed this week briefly knocked the currency to new lows.

"The Canadian dollar is recovering from a one-week low after Donald Trump threatened to impose another round of punishing tariffs on America's erstwhile ally to the north," says Karl Schamotta, analyst at Corpay.

Energy, potash, critical minerals, fish, and goods already subject to national security duties on steel and aluminium will be exempted; notably, imports that comply with the terms of the USMCA will not be spared.

"If implemented, we estimate the duties would affect roughly 4.6% of Canadian exports to the United States, inflicting serious damage on a number of industries and lifting the average tariff rate on Canadian goods by approximately 2.3 percentage points," says Schamotta.

Nevertheless, the Corpay analyst notes the CAD volatility strip remains low, suggesting FX is not panicking over the move.

The read is that traders have seen this all before and expect Trump to reverse from a maximalist opening salvo.

Of course, the risk for CAD is that the assumptions prove unfounded this time around.