The Canadian dollar has become a top pick in the $9.5-trillion-a-day foreign exchange market due to its link to oil prices as the war in the Middle East grinds on.
As most major currencies fell versus the U.S. dollar this week in the wake of conflict between the U.S. and Iran, the loonie has weathered the volatility that engulfed currency markets. Oil prices have climbed since attacks began last weekend, a supportive move for Canada, the world’s fourth-largest crude producer.
That’s driven strategists to highlight the currency’s resilience and call for continued strength in the short term.
“The Canadian dollar has emerged as the only major currency that was largely able to hold its ground versus the resurgent king US dollar since the start of the US-Iran conflict,” Valentin Marinov, head of G-10 FX research at Credit Agricole SA, said in an interview.
The Canadian dollar has also been supported by its proximity to the greenback as investors rushed to the dollar as a safe haven after the start of the war, according to Molly Schwartz, a strategist at Rabobank.
“This leaves CAD as the perfect candidate,” she said. “While CAD is still underperforming USD, it’s able to benefit from USD’s safe haven status and low implied volatility, and the oil correlation fundamentals.”
The loonie has also made some “pretty significant gains” this week against other major currencies, according to Shaun Osborne, chief foreign exchange strategist at Bank of Nova Scotia. It has strengthened against the Japanese yen, the euro and the British pound, reflecting how it has “leveraged that terms of trade improvement against the obvious energy consumers,” he said in an interview.
The most favourable trade to take advantage of the Canadian dollar’s strength would be to go long versus the pound, according to Sarah Ying, head of FX strategy at Canadian Imperial Bank of Commerce.
“Between euro and sterling, sterling probably is the one that gets punished more because they are also big importers and there were more cuts priced for the Bank of England than before,” she said.
President Donald Trump has said the US could continue attacking Iran for “four to five weeks,” but the US dollar fell after a New York Times report on Wednesday said Iranian operatives contacted the Central Intelligence Agency to discuss ending the war. Iran later denied its Ministry of Intelligence had reached out to the US.
Analysts also expect the loonie to be challenged as North American countries enter talks to renegotiate the US-Mexico-Canada Agreement, set to begin in July.
Patrick Locke, a FX strategist at JPMorgan Chase & Co., said the currency faces “medium-term and structural issues related to US-Canadian relations, tariff threats and the upcoming USMCA renegotiation risk.”
—With assistance from George Lei and Carter Johnson.
