This narrow alley's name was in general usage from the early 1800s. It’s one of the few lanes from the Rocks which survived the clean-up and mass demolitions after the Bubonic Plague of 1901.
So named either as a pun on the word "sewers", or because of its narrowness and it being a thoroughfare between two separate sections of The Rocks. Suez Canal was one of the most unsavoury places in Sydney in its time. It was haunted by prostitutes and larrikins, there were brothels, sly grog shops and an opium den.
At the end of a laneway in the courtyard near the British Seaman’s Hotel locals gathered to place their bets on blood sports like cock fighting. It was a brave or foolish person who wandered down the alleyways of The Rocks at night.
Women were warned never to go near Suez Canal, there were stories of young women who were kidnapped and forced to work in the brothels where the women were not much more than sex slaves. Ruth Park wove this into her novel of The Rocks ‘Playing Beatie Bow’ where the heroine, Abigail, is abducted and forced into a disused warehouse full of unsavory characters. Fortunately she is rescued before we find what hideous fate her abductors had in mind for her.