Canadian dollar traders position for extreme volatility on eve of tariffs

Traders are positioning for excessive volatility in the Canadian dollar, in the hours before President Donald Trump is expected to unleash his first wave of US import tariffs.

 

The cost to hedge against price swings in the loonie over the next week rose to the highest since October 2022 on Friday. It’s at the fifth-most expensive level since 2016, setting aside the pandemic years. Sentiment as captured by so-called risk reversals reached the most bearish on the loonie in nearly five years.

 

At a rate of 25%, US tariffs would risk causing a deep recession that could force the Bank of Canada to lower interest-rates much further than planned. The options premium to hedge for loonie swings — as measured by the spread between implied and realized volatility — climbed to the second highest since the 2008 global financial crisis.

The Canadian dollar, which fell to a near five-year low against the dollar Thursday, steadied on Friday during London trading hours. It was little changed at C$1.4484 per US dollar as of 5:33 a.m. in New York after whipsawing earlier amid month-end flows and ahead of data releases including US PCE inflation and Canada GDP.

 

 

Immediate tariffs could trigger a 2%-4% drop in the loonie, depending on whether oil is included, while a slower and softer implementation could make for a 1%-2% advance, according to Europe-based traders who asked not to be identified because they aren’t authorized to speak publicly.

 

 

 

 

This article was first reported by BNN Bloomberg