Photo credit: Reuters
The Canadian dollar has found an unlikely pocket of strength just as the trade relationship with the United States is becoming more confrontational. On September 8, the loonie touched C$1.3790, or 72.52 US cents. The move came as Ottawa’s new counter-tariffs took effect and Washington prepared fresh restrictions on Canadian goods.
Investing reports that the currency’s resilience does not mean investors believe the dispute is harmless. Instead, markets are weighing a different set of forces at the same time: surging oil prices, a softer US dollar, Canadian bond yields, and expectations for the Bank of Canada. For now, those factors have been powerful enough to outweigh some of the immediate fear surrounding the escalating trade fight.
Currency markets did not respond to the latest Canada-US confrontation in the way many might expect. The Canadian dollar strengthened 0.2% on September 8 to about C$1.3790 per US dollar and briefly reached C$1.3760, its best intraday level in nearly three weeks. Because the exchange rate is quoted as Canadian dollars needed to buy one US dollar, a lower number means a stronger loonie in practical market terms.
That move arrived on the same day Canada’s retaliatory tariffs took effect and after another round of threats from Washington. The contrast matters. A currency is not a simple referendum on one political development; traders continuously price energy, interest rates, growth, inflation and global demand for US dollars. The loonie’s rise therefore says more about the balance of market forces than about confidence that the trade dispute will soon disappear. It is strength under pressure, not evidence that the pressure is gone.
The biggest immediate support for the Canadian dollar has been oil. US crude futures touched a three-month high of US$94.73 a barrel on September 8 after attacks on Saudi energy facilities intensified concern about Middle East supply. By September 9, Brent crude was trading close to US$100 a barrel as geopolitical risks stayed elevated. For a major energy exporter such as Canada, that move can improve export revenues and the country’s terms of trade.
The link is more than market folklore. Bank of Canada research has found that energy and other commodity prices help explain movements in the Canadian-US exchange rate. When oil rises sharply, investors often reassess income flowing into Canada and the outlook for energy-producing provinces and companies. The same oil shock has a downside: expensive gasoline is already keeping Canadian inflation elevated. What helps the loonie through export income can simultaneously squeeze households and complicate monetary policy.
The Bank of Canada adds another layer to the loonie’s resilience. On September 2, the central bank held its policy rate at 2.25%, saying growth and inflation had evolved broadly in line with its July outlook. Inflation has been hovering around 3%, largely because of gasoline prices, while inflation excluding gasoline was 2.2% in July and core measures remained close to 2%.
For currency markets, the message is mixed but important. Higher oil prices can support the Canadian dollar, yet they also raise the risk that inflation stays elevated longer. The Bank warned that prolonged energy costs and new tariffs could feed into broader consumer prices. That makes aggressive rate cuts harder to assume. Interest-rate expectations matter because investors compare returns available in Canadian and US assets. The Bank is not targeting the exchange rate, but a policy path perceived as less dovish can still provide support for the loonie.
