Canadian Dollar’s Growing ‘Mini-Dollar’ Status Puts It at Risk

(Bloomberg) -- The Canadian dollar’s increasingly tight linkage to the US dollar risks dragging the loonie lower against global peers as the greenback weakens, according to RBC Capital Markets.

In recent years, the loonie has traded like a “mini-dollar” as one of the correlations between the two currencies to strengthen to its highest level since the early 2000s, Daria Parkhomenko, a foreign-exchange strategist at RBC, said in a Friday note. That’s despite the fact that Canada has been diversifying and reducing trade with the US — its biggest partner. And as the relationship grows it means any structural weakness in the world’s reserve currency will spillover into the loonie. 

On a fundamental level, the currencies’ connection means that the loonie mirrors the greenback’s move against other major Group-of-10 currencies, which include the euro, yen and sterling. For instance, if the US dollar falls against the euro, the Canadian dollar likely will too. But it also means that implied volatility in the USD/CAD currency pair is “cheaper than usual” when compared to other currencies, RBC said. 

So far in 2025, the US dollar is down some 13% versus the euro and 6% versus the yen. The greenback is down about 4% versus the loonie, meanwhile. 

Traders have long observed a close tie between the Canadian and US currencies given the deep economic relationships between the two North American economies. Even amid US President Donald Trump’s trade war, some 75% of Canada’s total trade in goods is still with the US, according to the latest Statistics Canada data from July —  albeit, down from nearly 90% a decade-and-a-half years ago.

Parkhomenko, nonetheless, sees a range of idiosyncratic factors that could weaken the traditional correlations between the two fiats in the months ahead, including:

Still, the risk in RBC’s view is that the loonie’s role as a greenback proxy becomes self-reinforcing. That would be similar to how global investors view the Swiss franc and Japanese yen as safe havens; if enough traders believe it, these currencies are the first to benefit in times of market turmoil.

“The longer the Canadian dollar’s mini-dollar bias holds, the more ingrained it may become for markets,” Parkhomenko said. 

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