(Bloomberg) — Canada’s dollar is heading for a wild week as US President-elect Donald Trump assumes office and traders prepare for the US to impose tariffs on the country’s exports.
The currency rallied 1.2% on Monday, set for its best day since May 2023, after a Wall Street Journal report that the administration won’t introduce new measures yet. Earlier in the day, it hit the lowest since the pandemic, with the options market betting on further losses.
Trump has threatened to impose 25% tariffs on all Canadian goods, and the country’s leaders have even had to bat away the idea of Canada becoming part of the US. That’s pushed up gauges of volatility and made hedging against against short-term swings in the loonie the most expensive in eight years.
“The market is panicking. It’s a classic case of a low-probability, high-impact event,” said Wells Fargo strategist Erik Nelson. “CAD vol has gone from ‘no bid’ to ‘no offer’ in just a few months, so the market is having some trouble processing the dramatic shift in demand.”
Trump’s inauguration has landed on a US national holiday, when trading liquidity is usually lower, which can exacerbate market moves. Outgoing Canadian Prime Minister Justin Trudeau has also threatened to respond with counter-tariffs.
“Tariffs on Mexico, Canada, and China should follow in short order — if not in the next 24 hours, likely by month-end,” said analysts at Monex Europe in a note. “The loonie looks set for a rollercoaster week, with risks skewed notably to the downside.”
The Canadian dollar traded around C$1.4315 per US dollar at 9:15 a.m. in New York, after falling to a near five-year low of C$1.4486 earlier. Monex Europe sees it hitting C$1.50 before mid-year. Jane Foley, head of G-10 FX strategy at Rabobank, said that a move to the C$1.48 area is probable. Both levels would be the weakest in more than two decades.
While the loonie has already fallen by around 8% since late September, it may not yet be fully discounting the potential implementation of tariffs. Options show traders are positioning for further losses.
Risk reversals, a closely-watched barometer, have risen to bearish levels rarely seen since March 2020. Meanwhile, a gauge of implied swings over the next week surged to its highest since December 2022 at 11.79%, putting the gap over realized volatility — effectively the premium to hedge — at the highest since 2016.
The dollar-Canadian dollar pair could “explode through recent range highs if Trump takes the gloves off,” said Brad Bechtel, head of FX at Jefferies. He said current levels for the loonie were around fair value, given real rate differentials and Canada’s political turmoil.
However, if Trump holds off from announcing tariffs or goes for a more gradual approach, gauges of volatility are in for a selloff. Rabobank doesn’t expect Trump to push through with the full threat of tariffs on Canadian exports, as that would make oil, gas and electricity instantly more expensive for US consumers, Foley said.
“Anything short of an immediately-imposed 25% US tariff on Canadian goods should result in USD/CAD vol coming back to Earth quite quickly,” said Wells Fargo’s Nelson.
(Updates with prices, tariff report. An earlier version of this story corrected the spelling of Wells Fargo in the final paragraph.)
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