LONDON, Jan 31 (Reuters) - Global currencies are bracing for heightened volatility as a deadline for tariff increases on two key trading partners looms, according to FX options signals. The Canadian dollar is particularly in focus.
President Donald Trump has set a deadline for Saturday to levy 25% tariffs on certain imports in an effort to pressure these countries to address issues related to illegal migration and the flow of fentanyl into the U.S. He indicated that tariffs might apply to oil imports, stating they "may or may not" be exempted.
Implied one-week volatility for the Canadian dollar has surged to its highest level since October 2022, while for the Mexican peso, it is the highest since the U.S. election in November.
The heightened implied volatility suggests that traders are preparing for significant movements in currency pairs, without indicating a specific direction.
Sagar Sambrani, a senior FX options trader at Nomura, noted a substantial interest in one-week options for the U.S. dollar/Canadian dollar pair.
The options market, where investors and companies typically hedge risk, indicates growing unease in the spot currency markets.
Following Trump's recent statements, the U.S. dollar surged by over 1% against the Canadian dollar within minutes, hitting a nearly five-year peak of C$1.4596 before retracting to around 1.4484 in London on Friday.
The Mexican peso has also experienced volatility, trading around 20.68 per dollar on Friday after depreciating by over 1% against the greenback on Thursday.
The peso's significant reliance on exports to the U.S., amounting to about 27% of its GDP and 83% of total exports, has led to multiple instances of depreciation against the dollar since Trump's election victory.
With Trump's attention predominantly on the Americas, volatility in currencies like the euro and Chinese yuan has decreased.
Regarding the situation involving the U.S., Canada, and Mexico, ING currency strategist Francesco Pesole stated that traders might view it as a barometer for Trump's future trade policies.
"If Trump fails to follow through on his threat by tomorrow, we may anticipate a depreciation of the dollar not only against the Canadian dollar and Mexican peso but also against other currencies vulnerable to tariff risks, such as the euro, Australian dollar, and New Zealand dollar," Pesole added.