CAD’s ‘exceptionalism’ – for how long?
Since the start of the US and Israeli operations in Iran on February 28, the Canadian dollar has functioned as a primary vehicle for the “energy dependence trade,” though its response is more complex than a simple “petrocurrency” label suggests. Market literature indicates this relationship is highly regime-dependent and currently sits below historical point estimates. The current, more muted beta likely reflects the fact that this is a fear-led supply disruption rather than a demand-led global boom, meaning the currency’s upside remains somewhat capped by broader USD dominance and geopolitical uncertainty.
The Loonie has nonetheless outperformed all major G10 peers, providing a temporary shield against lackluster domestic data. For instance, the CAD has seen a significant 2.6% jump against the Euro and a 2.4% rise against the Japanese Yen as energy costs pressured those regions. This “Canadian exceptionalism” has allowed the currency to decouple from the broader malaise affecting other major economies, essentially using the $155 billion value of its crude exports to offset trade frictions with the US. However, the geopolitical “fear bid” will likely be momentary, especially when the underlying domestic indicators suggest the economy is skating on increasingly thin ice.
Beneath this oil-slicked surface, the domestic credit market is beginning to show fractures that threaten to undermine the currency’s gains. The recent 57% plunge in shares of goeasy, a Canadian subprime bellwether, serves as a startling “canary in the coal mine” for the broader financial system. With subprime loan defaults surging to 12.9%, the risk of contagion is shifting toward the housing sector, where mortgage arrears are already climbing from historic lows. This trend is particularly acute in major hubs like Toronto and Vancouver, where arrears are projected to increase steadily through 2026. These internal stresses suggest that while high oil prices support the currency externally, the structural foundations of the Canadian economy look weak.
Ultimately, the Loonie’s current strength is plausible only as long as the Middle Eastern risk premium remains intact. While data from the EIA and international monitors may justify the rally, the currency’s true staying power hinges on the stability of domestic credit and internal growth. If a credible de-escalation occurs, oil prices will likely retrace, removing the pillar currently supporting the CAD through Q1. Once the geopolitical fog clears, the market will inevitably refocus on the consumer landscape, the CUSMA deal review and the rising default rates in the housing market. The Canadian dollar’s period of dominance is likely to prove short-lived as the cold reality of a sluggish domestic economy catches up with external volatility.
US-Iran conflict: Energy markets still in tension
The US dollar and broader financial markets currently sit in a state of high-tension anticipation as investors parse conflicting signals from the Trump administration regarding the Middle East. While the S&P 500 slipped 0.1% yesterday and the greenback stays bid, reacting to shifting headlines, the optimism that saw markets rebound on Monday’s close remains fragile as volatility is deeply embedded in the news cycle. For instance, the Israel Defense Forces (IDF) recently confirmed they have a “long plan” and a vast target bank remaining, yet President Trump suggests a swift conclusion is near, claiming there is “practically nothing left to target.” This dissonance is further complicated by reports that Iran is seeking a ceasefire with guarantees against future strikes, even as the administration maintains a stance of maximum pressure.
Beyond the political rhetoric, the physical security of global energy infrastructure continues to dictate the rhythm of market fluctuations. Recent reports indicate that drones have struck fuel tanks at Oman’s Salalah Port and disrupted activity near Dubai, while US Central Command warns that Iranian military equipment is being positioned in civilian ports. The Strait of Hormuz remains the ultimate flashpoint, with intelligence confirming the presence of mines in the waterway. Consequently, oil prices continue to dance to the beat of these volatile updates, and the International Energy Agency (IEA) approved a record release of 400 million barrels of crude to alleviate supply constraints. Despite these efforts, WTI and Brent remain volatile as traders weigh the reprieve of stockpile releases against a war with no visible end.
Looking ahead, even if the administration succeeds in decimating the regime’s immediate capabilities, the persistent presence of the IRGC raises serious questions about the long-term viability of a US exit. If production effectively takes months to be restored, and the conflict premium persists in oil prices, the focus will shift squarely to central bank forward guidance. Some argue that unlike the 2022 crisis, this situation could act primarily as a negative demand shock by undermining global consumer confidence through higher uncertainty and a spending squeeze at the pump. In regions where sentiment was already precarious, if the protracted scenario materializes, the path for central banks will be difficult to anticipate as they navigate a landscape where business and consumer confidence is shaken while inflation bites once again.
MXN: Peso under pressure
The recent surge in emerging market (EM) currency volatility marks a significant shift in recent market action. For months, EM volatility traded uncharacteristically below G7 levels, but this trend has reversed sharply as geopolitical tensions in the Middle East have intensified. This shift signals a breakdown in the carry trade environment, as the stability that previously favored high-yielding EM currencies is replaced by heightened idiosyncratic risks and global uncertainty.
The Mexican Peso (MXN) has felt this shift, seeing intense selling pressure that has seen the pair move from the 17.10–17.20 range in mid-February to a peak of 18.02, effectively erasing its year-to-date gains. While the market has recently stabilized closer to 17.7, the outlook remains clouded as inflation climbed to 4.02% in February, surpassing consensus of 3.94% and breaking above the central bank’s 4% upper threshold for the first time in nearly a year. The acceleration was driven by significant spikes in processed foods and a 9.88% surge in fruit and vegetable prices, while core inflation remained stubborn at 4.5%.
On the trade front, the review process of the USMCA has been officially launched. Negotiators are set to convene in Washington during the week of March 16, significantly ahead of the official July anniversary, to focus on tightening rules of origin and reducing dependence on non-regional imports. This early start introduces substantial headline risk for the Peso, as investors begin to price in the complex political and economic friction points inherent in renegotiating North American trade terms.
Compounding volatility, macro and political pressure there are headwinds coming from the oil market. The Peso’s traditional identity as a “petro-currency” has faded over the years; oil exports have dwindled to just 1.15% of GDP, while remittances have surged to a much more significant 3.31%. Given that MXN volatility is now bumping against a multi-month ceiling and trade risk is back, the double-digit gains enjoyed in 2025 will be difficult to replicate in 2026.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: March 9 – 13
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
