Published by Global Banking and Finance Review
Posted on January 31, 2025
By Alun John and Dhara Ranasinghe
LONDON (Reuters) - A deadline for U.S. tariff hikes on two of its top trading partners has global currency markets braced for increased volatility, FX options signal, with the Canadian dollar in the crosshairs.
President Donald Trump set the Saturday deadline to impose 25% tariffs on imports from Mexico and Canada in an effort to push them to halt illegal migrants and fentanyl from entering the U.S.
Trump reiterated on Thursday that he would impose tariffs and that oil imports "may or may not" be excluded.
Implied single-week Canadian-dollar volatility covering the period over the weekend has jumped to its highest since October 2022. For the Mexican peso, it is at its highest since last November's U.S. election.
Higher implied volatility shows traders are positioning for a sharp move in a currency pair, without specifying a direction.
Sagar Sambrani, a senior FX options trader at Nomura, said there had been significant demand for one-volatility options in the U.S. dollar/Canadian dollar currency pair.
The options market, where investors and companies typically hedge risk, shows increasing jitters in spot currency markets.
The dollar jumped by more than 1% on the Canadian dollar in a matter of minutes after Trump's latest comments, hitting a nearly five-year high of C$1.4596, before retreating. It was trading around 1.4484 in London on Friday. [CAD/]
Mexico's peso has also been choppy. After weakening by more than 1% against the greenback on Thursday, it was trading around 20.68 per dollar on Friday. [EMRG/FRX]
Mexico's exports to the U.S. account for roughly 27% of gross domestic product, and 83% of total exports. The peso has tumbled more than 1% against the dollar on at least seven occasions since Trump's election win last year.
With Trump's focus firmly on the Americas, volatility in other currencies vulnerable to trade tensions such as the euro and Chinese yuan has fallen.
"USD/CAD and USD/MXN are at the forefront of discussions because the threat of near-term tariffs from President Trump still hangs over both countries," said Sambrani, referring to the Canadian and Mexican currencies versus the U.S. dollar.
"Since the Presidential inauguration, we’ve observed future implied volatility in most FX pairs diminish significantly but both these pairs have one-month volatility close to their highs over the past two months".
ING currency strategist Francesco Pesole added that traders would treat the U.S.-Canada-Mexico situation as "a benchmark for Trump’s trade policy moving ahead."
"If Trump doesn’t deliver on his threat by tomorrow, we should see the dollar depreciate not just against the Canadian dollar and Mexican peso but also with other currencies that are embedding tariff risks (like the euro, Australian dollar and New Zealand dollar)," he added.
(Reporting by Alun John and Dhara Ranasinghe; Editing by Alexander Smith)
