Wondering if this is working as intended or if I should open a bug report. Olmecs had access to Copper from an Independent People. After I conquered the region, the trade did not cancel despite being set to luxuries only. 

That seems like a bug - or something that should be a bug.

Not sure.

If you read the trade treaty tooltip, the current treaty level only governs the formation of *new* trade treaties.

I've not tested it, but if the tooltip is to be believed, reducing your trade treaty from everything, to just luxuries, should *not* cancel any existing strategic resource trades.

It's unexpected that this same behaviour would persist through conquest of an independent, but not entirely without reason.