Loonie Strength Fades as Trade Tensions Rise

The Canadian dollar has had a strong quarter, gaining about 2.5% against the US dollar since the end of June when it hit a 19-month low at USD/CAD 1.42.

This rally was driven by stronger domestic data, firmer oil and gold prices, and earlier hopes of easing trade frictions.

However, renewed tensions in the Strait of Hormuz have pushed market-implied odds of a return to normal below 30% from over 50%, keeping a geopolitical risk premium in oil and gold that supports the CAD.

The National Bank of Canada forecasts USD/CAD to rebound towards 1.40 in the coming weeks before falling again towards 1.33 by 2027, citing fresh US tariffs and wider trade uncertainty as downside risks to Canadian growth.