Loonie Hits Four-Month Low Amid Oil Slide
The Canadian dollar fell to its weakest level since mid-May on Thursday, pressured by a sharp drop in oil prices and growing uncertainty surrounding the renewal of the U.S.-Mexico-Canada Agreement (USMCA). The loonie declined 0.2%, trading at 1.3960 per U.S. dollar, or 71.63 U.S. cents, after hitting an intraday low of 1.3986.
Oil, one of Canada’s top exports, closed 2.1% lower at $60.48 per barrel. The decline came as traders grew anxious about a potential oversupply ahead of the upcoming OPEC+ meeting. The market reaction was swift, with analysts pointing to the Canadian dollar’s sensitivity to energy prices. “It’s no surprise the Canadian dollar has broken down on the same day as oil,” said Adam Button, chief currency analyst at investingLive.
USMCA Negotiation Fears Intensify
In addition to oil volatility, traders are bracing for potential turbulence around the 2026 USMCA review. Although the agreement has protected Canada from U.S. tariffs on many exports, recent developments suggest a rocky road ahead. Public consultations on the pact have already begun in all three member countries.
“The market is finally waking up to the risk around USMCA,” Button noted. “It’s impossible to imagine a smooth USMCA negotiation.” These concerns have fueled investor caution and contributed to the loonie’s weakness, particularly as political tensions rise ahead of formal negotiations.
Outlook Clouded Despite Fed Cut Expectations
While a Reuters poll indicated that the Canadian dollar could strengthen over the next year due to anticipated Federal Reserve interest rate cuts, the uncertain future of USMCA poses a downside risk. Any disruption in trade relations with the U.S. — Canada’s largest trading partner — could undermine the loonie’s recovery.
Meanwhile, the Bank of Canada is re-evaluating how it measures core inflation to better assess the effects of external shocks on the economy. Deputy Governor Rhys Mendes stated the central bank is considering changes to improve its understanding of macroeconomic trends.
Bond Yields Decline as Uncertainty Grows
Amid the broader market volatility, Canadian government bond yields edged lower across the curve. The benchmark 10-year bond yield dropped 1.8 basis points to 3.167%. Investors are closely monitoring macroeconomic signals and central bank commentary for clues on future monetary policy shifts.
