Canadian Dollar Poised for Volatility Amid Trump's Inauguration and Tariff Threats

Canada's currency is bracing for a tumultuous week as US President-elect Donald Trump assumes office, fueling concerns over potential tariffs on Canadian exports.

Currency Hitting New Lows, Volatility Surging

On Monday, the Canadian dollar fell to its lowest level since the pandemic, prompting a surge in options bets anticipating further losses. Volatility gauges have spiked, making it the most expensive in eight years to hedge against short-term fluctuations in the "loonie."

Trump's Expected Executive Orders

Trump's inauguration coincides with a US national holiday, potentially exacerbating market moves due to lower trading liquidity. He has vowed to issue a series of executive orders, including threats of 25% tariffs on Canadian goods.

Market Panic and Counter-Tariff Response

"The market is in a panic," said Wells Fargo strategist Erik Nelson. "The loonie's volatility has jumped significantly, and the market is struggling to adjust to the increased demand for hedging."

Canadian Prime Minister Justin Trudeau has threatened to retaliate with counter-tariffs, further escalating tensions.

Analysts Predict Further Decline

Analysts expect the Canadian dollar to endure a turbulent week, with risks tilted heavily to the downside. Monex Europe predicts it could hit C$1.50 by mid-year, while Rabobank anticipates a slide towards C$1.48, both levels representing multi-decade lows.

Options Market Pricing in Losses

Options trading indicates that traders are anticipating further depreciation. Risk reversals, which measure market sentiment, have reached bearish levels last seen in March 2020.

Potential Tariff Impact May Not Be Fully Priced In

Despite an 8% drop in the loonie since September, analysts suggest that the market may not fully discount the potential impact of tariffs.

Volatility Expected to Moderate if Tariffs Not Implemented

However, if Trump does not announce tariffs or adopts a gradual approach, volatility gauges are anticipated to decline. Rabobank believes it's unlikely that Trump will fully implement the threatened tariffs, as it would increase energy costs for US consumers.