(Bloomberg) -- 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.
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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 rose 0.1% to C$1.4475 per US dollar as of 8:49 a.m. in New York after data showed the Canadian economy gained strength at the end of last year. Advance data suggested gross domestic product grew 0.2% in December, a reversal from a 0.2% decline in November. The loonie fell to a near five-year low against the dollar Thursday.
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.
(Updates with prices, Canada GDP.)
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