(Bloomberg) — The Canadian greenback’s more and more tight linkage to the US greenback dangers dragging the loonie decrease towards world friends because the buck weakens, based on RBC Capital Markets.
Lately, the loonie has traded like a “mini-dollar” as one of many correlations between the 2 currencies to strengthen to its highest degree for the reason that early 2000s, Daria Parkhomenko, a foreign-exchange strategist at RBC, mentioned in a Friday observe. That’s although Canada has been diversifying and decreasing commerce with the US — its greatest associate. And because the relationship grows it means any structural weak spot on the earth’s reserve foreign money will spillover into the loonie.
On a basic degree, the currencies’ connection implies that the loonie mirrors the buck’s transfer towards different main Group-of-10 currencies, which embrace the euro, yen and sterling. As an illustration, if the US greenback falls towards the euro, the Canadian greenback seemingly will too. However it additionally implies that implied volatility within the USD/CAD foreign money pair is “cheaper than normal” when in comparison with different currencies, RBC mentioned.
Thus far in 2025, the US greenback is down some 13% versus the euro and 6% versus the yen. The buck is down about 4% versus the loonie, in the meantime.
Merchants have lengthy noticed a detailed tie between the Canadian and US currencies given the deep financial relationships between the 2 North American economies. Even amid US President Donald Trump’s commerce warfare, some 75% of Canada’s complete commerce in items remains to be with the US, based on the most recent Statistics Canada knowledge from July — albeit, down from practically 90% a decade-and-a-half years in the past.
Parkhomenko, nonetheless, sees a variety of idiosyncratic elements that would weaken the normal correlations between the 2 fiats within the months forward, together with:
Nonetheless, the chance in RBC’s view is that the loonie’s function as a buck proxy turns into self-reinforcing. That might be much like how world traders view the Swiss franc and Japanese yen as protected havens; if sufficient merchants consider it, these currencies are the primary to profit in instances of market turmoil.
“The longer the Canadian greenback’s mini-dollar bias holds, the extra ingrained it might grow to be for markets,” Parkhomenko mentioned.
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