Expanding Canadian Dollar status as a Minor Currency could potentially heighten its vulnerability
The Canadian dollar has seen a significant shift in its relationship with the US dollar, with the linkage between the two currencies growing stronger and reaching its highest level since the early 2000s. This phenomenon, often referred to as the "mini-dollar" proxy, could become self-reinforcing, according to analysts.
Traders have historically observed a close tie between the Canadian and US currencies due to their deep economic relationships. This ties extends to the market, where the strengthening correlation means the loonie mirrors the greenback's movement against major Group-of-10 currencies.
RBC Capital Markets predicts that the loonie may weaken against global peers as the US dollar weakens. This prediction is based on the current state of the US dollar, which has depreciated by about 13% versus the euro and 6% versus the yen, while depreciating about 4% versus the loonie as of 2025.
If the US dollar falls against the euro, the Canadian dollar is likely to follow suit. This is because the Canadian economy is heavily intertwined with the US, with about 75% of Canada's total trade in goods still with the US, down from nearly 90% a decade-and-a-half years ago. The latest Statistics Canada data from July indicates that Canada's trade with the US is still significant, although it has been decreasing over time.
However, Daria Parkhomenko, an analyst, suggests that idiosyncratic factors could potentially weaken the traditional correlations between the Canadian and US dollars in the coming months. These factors include a divergence in monetary policy as the Bank of Canada and US Federal Reserve take different interest rate paths, markets pricing in or out US exceptionalism, and the possibility of negative headlines from renegotiations of the USMCA trade deal.
One such idiosyncratic factor that could strengthen the loonie's role as a greenback proxy is its perceived status as a safe haven. In times of market turmoil, global investors may view the Canadian dollar as a safe haven if enough traders believe it. This perception could potentially strengthen further, making the loonie's "mini-dollar" bias more deeply entrenched in market perceptions.
Implied volatility in the USD/CAD currency pair is "cheaper than usual" when compared to other currencies, according to RBC. This could indicate a potential opportunity for traders looking to capitalise on the fluctuating relationship between the two currencies.
As the Canadian dollar continues to evolve in its relationship with the US dollar, it will be interesting to see how these idiosyncratic factors play out and whether the loonie maintains its status as a "mini-dollar" or carves out a unique identity of its own.
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