Loonie Weakens Amid Trade Tensions with US

Canada's loonie has weakened despite rising oil prices due to escalating trade tensions with the US. The Canadian dollar slipped after the US imposed a ban on imports of several Canadian goods, including alcoholic beverages, motorcycles, and dairy products, in response to Canada's retaliatory tariffs. This move has dampened short-term sentiment towards the loonie, as investors price in more uncertainty around Canada's biggest customer, the US buys about 70% of Canada's exports.

The rates backdrop is also tightening, with Canada's 10-year government bond yield reaching its highest level since May 2024. This has led to concerns that higher oil prices could keep inflation sticky and influence the Bank of Canada's next moves. Meanwhile, a softer loonie can make imported goods more expensive for Canadians, complicating the near-term inflation picture.

RBC Capital Markets notes that trade spats can add pressure on the Canadian dollar, as investors demand an extra 'risk premium' to hold Canadian assets, weighing on the currency.