For decades, the Canadian dollar moved in lockstep with oil – a natural relationship for a major energy exporter. But the current surge in oil prices driven by the U.S.–Iran conflict has provided no support to the loonie. The disconnect between the currency and crude has reached a historic high, and Trump’s tariffs have nothing to do with it.
- How it used to be: the loonie and oil moved as a pair
Historically, the Canadian dollar closely correlated with Brent crude, rising and falling alongside it, which made sense for a country heavily reliant on energy exports. But in recent years, something has broken: since the pandemic, there have been two major oil price spikes – Russia’s invasion of Ukraine in 2022 and the current U.S.-Iran conflict – and neither produced any meaningful appreciation of the Canadian dollar (CAD).
The Canadian dollar (black line, inverted $/CAD) and Brent crude (blue line) since the start of the pandemic. The chart shows that both major oil shocks, in 2022 and 2026, bypassed the loonie entirely: the historical relationship has broken down.
- Testing the hypothesis: it’s not about interest rates or risk appetite
To rule out alternative explanations, analysts run a regression of $/CAD on three factors: the spread between U.S. and Canadian two‑year yields (capturing monetary‑policy divergence), the price of Brent crude, and the VIX index (capturing global risk appetite – the Canadian dollar is a high‑beta currency sensitive to swings in the S&P 500).
Chart 2. Actual USD/CAD (black line) versus regression‑based estimates using the full 2000–2026 sample (blue line) and the pre‑crisis 2000-2019 sample (red line). The gap between the red and blue lines shows that the oil-USD/CAD correlation broke down roughly during the COVID period.
Both regressions, the full sample and the pre‑crisis sample, point to the same conclusion: the Canadian dollar should be significantly stronger than it is today. Interest rates and global risk appetite are not the explanation – they are already accounted for in the model.
- How large is the gap: 2–3 standard deviations
Deviation of actual USD/CAD from the regression‑estimated values, measured in standard deviations. The key illustration: the scale of undervaluation is unprecedented across the entire history of observations.
The magnitude of this mispricing has no historical precedent. It is tempting to blame Trump’s tariffs, but the timeline does not match: tariff announcements do not coincide with the moment when the Canadian dollar detached from oil. The cause is something more fundamental. Something in the loonie has broken, and tariffs have nothing to do with it.
- Not just the loonie: a broader puzzle across commodity currencies
The Canadian dollar is not alone in this pattern of undervaluation. Other commodity‑linked currencies that should have benefited from rising oil and broader commodity prices are also trading in a depressed state.
- The Australian dollar is likewise significantly undervalued relative to commodity dynamics.
- The Brazilian real shows the same pattern, despite the country’s record trade surplus.
Conclusion
The Canadian dollar is only one piece of a much larger puzzle. What is systematically weighing on commodity currencies across several different economies remains an open question. Still, the scale and synchronicity of the undervaluation suggest that the cause is deeper than local, country‑specific factors.
What this means for markets
For traders in commodity currencies, the divergence of CAD/AUD/BRL from commodity prices is a signal to watch for a potential catch‑up correction if the underlying cause of the undervaluation becomes clearer or dissipates. Until then, the traditional model “oil up → loonie up” is temporarily not working, and this should be factored into CAD trading strategies.
*This material has been prepared for analytical and educational purposes. It does not constitute investment advice.
**Based on materials by Robin J. Brooks July 26, 2026 Oil · Canada · CAD