The Canadian dollar is heading for a wild week as U.S. President-elect Donald Trump assumes office, with traders prepping for tariffs being slapped on the country’s exports.

On Monday, the currency hit the lowest since the pandemic struck markets, and options bets on further losses have surged in recent days. It’s now the most expensive in eight years for traders to hedge against short-term swings in the loonie after gauges of volatility spiked.

The moves come ahead of Trump’s inauguration later on Monday, after which he’s expected to unleash a raft of executive orders. Trump has threatened to impose prepping for tariffs on all Canadian goods, and the country’s leaders have even had to bat away the idea of Canada becoming part of the U.S.

“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 U.S. national holiday, when trading liquidity is usually lower, which could exacerbate market moves. Outgoing 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 69.44 cents U.S. by 8 a.m. in New York, after hitting a near five-year low of 69.03 in Asian hours. Monex Europe sees it hitting 66.66 cents U.S. before mid-year. Jane Foley, head of G-10 FX strategy at Rabobank, said that a move to the 67.56 cents U.S. area is probable. Both levels would be the weakest in more than two decades.

While the loonie has already fallen by around eight per cent 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 per cent, 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 per cent U.S. tariff on Canadian goods should result in USD/CAD vol coming back to Earth quite quickly,” said Wells Fargo’s Nelson.

Bloomberg.com