By Michael O’Neill
The Canadian dollar is doing what it always does when crude oil prices explode. It dances around like Elaine from Seinfeld.
The oil market has been whipsawed by the rapid unwind of the Iran war-risk premium after Trump announced there had been “great progress” toward a final agreement with Iran. He also said “Project Freedom,” the US naval operation aimed at escorting ships through the Strait of Hormuz, would be paused temporarily while negotiations continue.
The news sent crude prices tumbling as the geopolitical fear premium eased. The US dollar slipped while global equity markets caught fire. But….
There is Always a Catch
Trump also confirmed that the blockade would remain “in full force and effect,” which means the shipping mess in the Persian Gulf has not magically disappeared. Commercial traffic through Hormuz remains heavily disrupted. Only 11 ships have made the transit in the past 24 hours and there are still 400 vessels in line.
The ships waiting to transit may be delayed further. Trump appears to have changed his tone about the “great progress” towards an Iran agreement. Around 5:00 am PT, he tweeted another threat, imploring Iran to agree to “what’s been agreed” or “the bombing starts, and it will be, sadly, at a much higher level and intensity than it was before.”
Sales of neck brace collars surged as oil prices started climbing again and the greenback gave back some gains.
Balancing Act
Canadian dollar traders are walking a tightrope between falling but still elevated oil prices, and a somewhat pessimistic economic outlook from the Bank of Canada which contrasted with a resilient US economy powered by robust tech earnings and AI investments.
BoC Governor Tiff Macklem delivered a fairly downbeat assessment of the Canadian economy when he testified before the Senate Banking Committee on Monday. He noted that growth remains weak, unemployment is stuck near 7%, and exports and business investment are struggling under the weight of US tariffs and global uncertainty. In addition, the Middle East conflict has revived inflation risks through sharply higher energy prices.
Markets heard a central bank that is increasingly worried about stagflation-style conditions taking hold in Canada.
Fed has Different Problems
The contrast between last week’s statements from the Federal Reserve and the Bank of Canada could hardly be sharper, and the divergence matters for the Canadian dollar.
The Fed remains trapped in an inflation fight that refuses to die. Chair Jerome Powell repeatedly stressed that inflation is “elevated,” energy prices are rising because of the Middle East conflict, and tariff-related price pressures are still filtering through the economy. He acknowledged that the FOMC debated removing its easing bias altogether, while some members even wanted guidance tilted toward possible rate hikes. Powell made it clear that the Fed is in no hurry to cut rates and may need to remain restrictive for longer.
Canada does not have an inflation problem — yet.
That difference is critical for currency markets. The Fed is signalling “higher for longer,” while the BoC appears content to idle in park. Wider interest-rate differentials generally favour the US dollar because global investors can earn better returns holding US assets.
The irony is that higher oil prices would normally support the Canadian dollar because Canada is a major energy exporter. But this time, the oil boost risks being overwhelmed by weaker Canadian growth and a more dovish central bank. If the Fed keeps rates elevated while the BoC holds steady, capital flows are likely to continue favouring the US dollar over the loonie.
Trump is a Wild Card for Both
It’s no secret that Trump dislikes Fed Chair Jerome Powell. Trump has made no secret of his disdain for Powell, largely because the Fed Chair refuses to deliver the aggressive rate cuts Trump wants.
President Trump previously targeted Powell with a Justice Department probe into renovation costs tied to the Fed’s Washington headquarters. The White House backed away from the investigation after Senator Thom Tillis blocked Trump’s nominee for Fed Chair until the matter was dropped. However, prosecutors left the door open to revive the case if independent reviews uncover wrongdoing.
That uncertainty likely influenced Powell’s decision to remain on the Board of Governors until his term expires on January 31, 2028. The move blocks Trump from immediately installing another loyalist at the Fed.
For Macklem, Trump’s hostility toward Canada has already materialised through aggressive tariffs on steel, aluminium, and softwood lumber. The looming reopening of CUSMA negotiations is likely to add another layer of uncertainty for businesses and policymakers alike.
For now, the oil shuffle will keep the Loonie dancing until Trump changes the tune.
