Traders who’d bet on sharp swings in the US$7.5 trillion-a-day foreign-exchange market surrounding Donald Trump’s last two tariff deadlines are taking a new approach as the U.S. president vows an April 2 trade reckoning.
Expectations for volatility in options tied to tariff-sensitive currencies — such as the Canadian dollar and euro — have actually been easing over the past two weeks, according to data compiled by Bloomberg.
Such a subdued outlook stands in stark contrast to the spike in FX volatility measures seen earlier this year around the U.S. president’s previously threatened levy dates.
To UBS strategists Alvise Marino and Vassili Serebriakov, it’s becoming clear that traders prefer to take a wait-and-see approach to the tariffs given the recent series of false starts.
“There is, in our view, the distinct possibility that next week’s deadline might not produce a full and clear picture of the administration’s trade policy,” they wrote in a research report on Wednesday. Trump could instead “introduce new deadlines for further studies,” yet again extending the “tariff limbo” in place over the past two months, the analysts added.
With more than 75 per cent of Canadian exports bound for the U.S., Trump’s threats to impose 25 per cent tariffs on Canadian goods led to a wild ride for the loonie.
One-month implied volatility for the U.S. dollar-loonie closed at 7.85 per cent on Jan. 28 — one week before Trump delayed the tariff for a month — and at 7.59 per cent on Feb. 25, a week prior to the U.S. president exempting Mexican and Canadian goods covered by the USMCA free trade agreement from trade levies.
That same loonie gauge declined a third session out of four to finish Wednesday at 6.44 per cent, the lowest close since Feb. 20 and falling through its 100-day moving average of 6.64 per cent.
The drop took place despite Trump unveiling tariffs on auto imports and harsher punishment on Canada and the EU if they join forces against the U.S. The volatility measure has held steady so far on Thursday.
For the euro-U.S. dollar, one-month implied volatility extended declines, down a seventh straight session to 7.11 per cent on Thursday. The gauge fell as low as 7.06 per cent Wednesday, just above its 200-day moving average.
George Lei, Bloomberg News
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