The Trump administration has confirmed that USMCA goods will keep their tariff exemption, countering earlier statements. Previously, President Trump set a 35% tariff on Canada, which caused a significant drop in the Canadian dollar. As a result of the tariff, the USD increased while currencies like the EUR, AUD, NZD, GBP, JPY, CHF, and CAD fell sharply. After the tariff exemption was clarified, the Canadian dollar began to recover from its earlier decline.

Market Reactions and Volatility

Despite a slight easing of tensions following the policy clarification, the market’s initial reaction to the tariffs still influences recent price movements. The sudden drop in multiple currencies—except for the US dollar—shows that traders were caught off guard. Volatility indicators suggest that uncertainty is still priced in. The quick decline and partial recovery of the Canadian dollar indicate that the market reacted more to conflicting policies than to actual economic conditions. Notably, the USD remained strong as traders sought safety, reflecting typical behavior during geopolitical stress. The pace of these changes highlights how sensitive currency markets are to trade discussions. For example, Powell has consistently guided monetary policy expectations, but unexpected shocks like this can overshadow interest rate differences and affect short-term currency positioning. Looking at the rapid changes in AUD and NZD, it seems that global trade risks have impacted sentiment more than local economic updates. This suggests a temporary disconnect between local economic data and currency values, usually seen when external factors are strong enough to influence valuations. In such cases, one-sided positioning can stretch beyond typical value ranges, leading to sharp price corrections upon any indication of policy changes.

Derivatives Perspective on Risk

From a derivatives viewpoint, option pricing skews have widened, especially in short-term CAD pairs, indicating ongoing uncertainty in policies. Put-call volatility shows a slight bias toward CAD downside, even after the recent recovery, signaling that traders are cautious. Open-interest build-ups seem more defensive than speculative. Similar patterns are seen in Yen contracts, indicating a shift back to traditional safe-haven hedging but with lower volume than during previous trade disputes. As market dynamics evolve, it’s essential to interpret risk accurately through both historical relationships and current flows. For those already invested or using model-based strategies, it’s not the time to depend solely on technical analysis or trends. Momentum has shifted in several currency pairs, and historical volatility may create inconsistent re-entry points, complicating delta management. For instance, the recent movements of Sterling have not closely aligned with typical drivers. Traders now need to focus more on cross-correlations and future volatility signals rather than just past GDP or inflation data. Tariff discussions still have the potential to cause shocks. Even with the current exemption, traders have already factored in the risk of changes. Adapting your hedges dynamically is currently more beneficial than holding onto strong beliefs. Our main challenge is not to identify trends, but to understand the asymmetric tail risks and adapt quickly. Avoid making assumptions. Focus on what is happening right now. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now