Canada's Loonie Slumps Under Oil Price and Trade Policy Pressures

Canada's loonie is struggling to gain momentum due to two main factors: declining oil prices and uncertainty surrounding US trade policy. Commerzbank Research notes that Canada's domestic economy appears to be stabilizing, but the currency still reacts like a 'two-factor' story.

The first factor, oil prices, has historically supported the loonie as Canada is a major energy exporter. However, when crude prices fall, this support disappears and the Canadian dollar loses its tailwind. The second factor, trade uncertainty, is also weighing on the currency. Commerzbank warns that the risk of 50% US tariffs on some Canadian goods from Wednesday could further destabilize the loonie.

Trade policy uncertainty can keep the Canadian dollar weak even when the domestic economy is doing well. When the loonie falls, prices for imported goods and services tend to increase, affecting consumers who rely on cross-border travel, US streaming subscriptions, online purchases in USD, and other imports.