Investors are piling into hedges against a weaker Canadian dollar at a historic pace, seeking shelter from the impact of possible U.S. tariffs, according to JPMorgan Chase & Co.

The threat of a 25 per cent tariff on Canadian imports as soon as next month — made by U.S. President Donald Trump after his inauguration this week — has Wall Street currency-watchers forecasting record lows for the so-called loonie, sending companies and investors scrambling for protection.

That’s driven options trading volume in the U.S. dollar-Canadian dollar pair toward all-time highs, while loonie futures volume reached a record on Tuesday, according to JPMorgan strategists, citing the firm’s proprietary data as well as Depository Trust and Clearing Corporation and Commodity Futures Trading Commission figures.

The U.S. dollar-Canadian dollar pair “has dominated FX options trading over the last week as investors have sought record levels of protection from tariffs,” JPMorgan’s Patrick Locke, Kunj Padh, and Ladislav Jankovic wrote Friday. The loonie “has screened short on our metrics for a long time — but that did not preclude a massive bid for USD/CAD calls in recent sessions as Canada remains in the cross-hairs of U.S. trade policy.”

The demand for protection against a weaker loonie has pushed risk reversals — a measure of the cost to hedge in the options market via calls versus put structures — to levels last seen more than two years ago. The three-month sentiment gauge shows traders are near the most bearish on the Canadian currency since November 2022.

The JPMorgan strategists said traders’ short position against the loonie in the derivatives market — which now totals some US$11.7 billion among speculative traders, the most among the G-10 according to CFTC data aggregated by Bloomberg — is both “deep and broad-based.”

The median of strikes on basic calls on the U.S. dollar versus Canadian dollar is around 1.455, they said, with a “handful” of strikes falling in the 1.50s. The loonie is trading around 1.4331 per U.S. dollar, having weakened about 3.5 per cent from around 1.38 at the time of the U.S. election in November.

Separately Friday, currency strategists at Nomura Plc recommended shorting the loonie versus the Australian dollar, seen as vulnerable if the Trump administration imposes tariffs on China. The firm anticipates a nearly three per cent increase in the pair to 0.93 from about 0.9050 currently.

“While it’s unclear whether Trump is using tariff threats against Canada as leverage for early USMCA negotiations or to address alleged migration and fentanyl issues, U.S.-Canada relations appear strained,” a Nomura team including Craig Chan and Dominic Bunning wrote Friday, referring to the U.S.-Mexico-Canada Agreement, NAFTA’s successor signed during Trump’s first term. “Meanwhile, Trump’s somewhat less confrontational stance on China (so far) is supporting market risk sentiment.”

Bloomberg.com