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CAD: Vol Markets Still Cognizant of Tariff Risk on CAD

CAD
USCanadaBulletMarketsForeign Exchange BulletsNorth America
  • We noted this morning that USD/CAD spot has erased the run higher to 1.4178 (triggered by Trump's tariff talk), aided off highs by Trudeau's swift contact with Trump and renewed pressure from both sides of the aisle to tighten US-Canadian border security.
  • While spot has backtracked, options markets remain acutely sensitive to the prospect of further vol. 2m Implied - capturing inauguration day on January 20th - is still clear of 5.5 points, and the vol skew remains weighted well toward USD/CAD calls - the 3m risk reversal remains at levels not seen for 18 months, dragging the upside risk premium away from subdued levels in September that rivalled the post-COVID lows.
  • This underlying theme is also evident in still-elevated butterfly option vol: the 3m contract remains north of 0.5 vol points, ~50% higher than the YTD average. Options markets now price a 1-in-4 chance of USD/CAD touching 1.45 by end-Q1, up from 17.8% pre-election.
  • As such, despite the pullback in USD/CAD, the trend outlook remains bullish and clearance of 1.4178 would resume the primary uptrend to target 1.4196, a Fibonacci projection. This poses upside risks to analyst consensus, which currently looks for 1.39 at end-Q1'25.
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  • We noted this morning that USD/CAD spot has erased the run higher to 1.4178 (triggered by Trump's tariff talk), aided off highs by Trudeau's swift contact with Trump and renewed pressure from both sides of the aisle to tighten US-Canadian border security.
  • While spot has backtracked, options markets remain acutely sensitive to the prospect of further vol. 2m Implied - capturing inauguration day on January 20th - is still clear of 5.5 points, and the vol skew remains weighted well toward USD/CAD calls - the 3m risk reversal remains at levels not seen for 18 months, dragging the upside risk premium away from subdued levels in September that rivalled the post-COVID lows.
  • This underlying theme is also evident in still-elevated butterfly option vol: the 3m contract remains north of 0.5 vol points, ~50% higher than the YTD average. Options markets now price a 1-in-4 chance of USD/CAD touching 1.45 by end-Q1, up from 17.8% pre-election.
  • As such, despite the pullback in USD/CAD, the trend outlook remains bullish and clearance of 1.4178 would resume the primary uptrend to target 1.4196, a Fibonacci projection. This poses upside risks to analyst consensus, which currently looks for 1.39 at end-Q1'25.