The foreign exchange market “turned upside down” within 24 hours, just because of Trump! “High volatility” will be the key word in the foreign exchange market in 2025

The Zhitong Finance App learned that on Monday, the foreign exchange options market of over 300 billion US dollars initially began peacefully until political headlines in Canada and the US triggered the busiest foreign exchange options trading day in the past two months — the scale of foreign exchange options market trading rapidly heated up, indicating that political factors in 2025, especially all political news related to Trump himself, will influence the trading trend of the foreign exchange market.

According to statistics from Depository Trust and Clearing Corp. (Depository Trust and Clearing Corp.), the volume of transactions soared to $108 billion at the close of Monday, even surpassing the trading volume on the day the Federal Reserve and the Bank of Japan announced monetary policy last month. The two major factors driving the surge in forex options trading volume are the resignation of Canadian Prime Minister Justin Trudeau and all the news related to potential US tariffs.

According to statistics from Nomura International Securities, active trading on Monday included a brief surrender of the euro's parity position against the US dollar after rumors that Trump might loosen tariffs (Trump later raged as “fake news”). Barclays Bank, on the other hand, said that some investors have cut USD/CAD Vanilla Calls call options and digital options, and these options could have benefited from the strengthening of the US dollar. Standard Chartered Bank said that Asian currencies are also the focus of attention, and some traders have begun to take advantage of the brief weakening of the US dollar to buy bullish options against Asian currencies such as the Japanese yen and the Korean won.

As political risks spread to the foreign exchange market with a daily trading volume of 7.5 trillion US dollars, the long-term background of the continued rise of the US dollar can be described as a major catalytic catalyst. Hedge funds, including speculative forces, have pushed bullish dollar positions to the highest level since January 2019 due to the surprisingly strong performance of the US economy, as well as the threat of tariffs from incoming President Donald Trump boosting the financial market's safe-haven demand for the dollar, and Trump's stance on promoting economic prosperity is expected to push US stocks to the highest level since January 2019.

At the same time, this one-sided position means that once the market suddenly reverses, bulls that are bullish on the dollar will have a huge risk of losing money. This was very obvious after the “Washington Post” headline news about Trump's possible tariff easing came out on Monday — the sudden decline in the dollar caused serious losses in just a few hours, but after Trump refuted the rumor, their losses related to bullish dollar contracts were largely recovered.

On Monday, the market believed that short-term funding was removing long option positions on the bullish dollar against the national currency threatened by tariffs. Earlier, the Washington Post reported that Trump's aides are studying the tariff plan, which will apply to all countries, but only cover key imports and not all imports. However, Trump later denied the report and denounced the Washington Post for spreading false information.

“Today's price trend in the foreign exchange market, driven by tariff news, gives us a glimpse into the potential situation of US President Trump's administration in the next four years. Volatility is inevitable.” Sagar Sambrani, a senior foreign exchange options trader from Nomura International Securities in the London market, said, “Wall Street has seen a decline in downside bearish trading contracts for the euro and the pound in the medium term (1 to 3 months), while the upward trading of the dollar against the Swiss franc also showed a profitable settlement trend.”

According to media reports, Trudeau is about to announce his resignation as leader of the Canadian Liberal Party, which has also stimulated the foreign exchange options market. Traders are seeking to lock in profits from USD/CAD trading, after the Canadian dollar, which had continued to plummet since November, when the exchange rate had continued to plummet, began to rebound sharply. After the latest news about Trudeau's resignation as leader of the Liberal Party came out, the Canadian dollar exchange rate, which had been plummeting since November, finally improved, and the sovereign currency's exchange rate against the US dollar began to rebound at an accelerated pace on Monday.

Faced with additional tariffs initiated by Trump, who will officially take office as US President in January, compounded by the recent political chaos of the Canadian government led by Prime Minister Justin Trudeau after the shocking resignation of the Minister of Finance, the exchange rate of the Canadian dollar against the US dollar has continued to plummet since November, and the Canadian dollar exchange rate (against the US dollar), which has continued to be sold off, recently depreciated to its lowest level since the March 2020 pandemic. Furthermore, after the Bank of Canada cut interest rates sharply in a row, the gap in interest rates and treasury bond yields between Canada and the US also put selling pressure on the Canadian dollar.

For the already weak Canadian economy, Trump's imposition of tariffs is undoubtedly “worsening the situation.” After all, the US is the core exporter of most Canadian products, and the Canadian economy can be described as heavily dependent on foreign exports, especially exports to the US. Judging from recent news from the Trudeau administration, it appears that Trudeau was unable to reach an agreement with the new US administration team led by Trump at the time. According to media reports, Trump even told Trudeau that night that Canada could become the 51st state of the United States, and Trudeau could become the governor, causing an uproar in Canadian public opinion.

Mukund Daga, head of Asian foreign exchange options at Barclays Bank in the Singapore market, said the news “is considered very beneficial to the Canadian dollar trend, because with Trudeau stepping down, the market anticipates that this will provide Canada's incoming new leaders with more room to imagine cooperation with the Trump administration rather than confrontation with each other, and may provide a typical example for countries around the world to ease tariff disputes with the US.” “We have seen USD/CAD bullish options and digital options closed because the market settled the USD/CAD trend profitably and turned to betting on the Canadian dollar to start a rebound.”

The US dollar's brief weakness has also spawned other bullish dollar trades that have been one-sided since November. Some foreign exchange traders believe that it may be difficult for EURUSD to fall to parity, so bearish bets on EURUSD began to lift after the “Washington Post” fake news came out, driving a brief rebound between the euro and the pound.

However, this trend of non-US dollar currency exchange rate warming may be very short, or may even last less than 24 hours. Therefore, foreign exchange market traders still generally expect that the Trump administration will adopt stricter tariff measures and domestic tax cuts than the previous term to boost the US economy. At the same time, the potential recovery in inflation will also push the Federal Reserve to maintain high interest rates in the long term, and global capital may be bullish on the US dollar for most of 2025.

However, any trend in the Trump administration that exceeds market expectations, such as news about the Trump administration revealed by the “Washington Post” — even if later refuted by Trump as false news, may cause sharp fluctuations in the US dollar index within just a few hours. The non-US dollar exchange rate linked to Trump's policies and falling deeply may experience a wave of sharp upward trends in the short term.

Saruba Tandon, the global head of foreign exchange options at Standard Chartered Bank in the Singapore market, said: “People seem to absorb the dollar on dips. The foreign exchange market believes that the dollar will continue to rise for some time in the context of the Federal Reserve maintaining high interest rates, rather than the so-called short-term effect. Forward points also provide a good entry point for arbitrage trading”

Tandon said that a new popular expression in the foreign exchange market that appeared on Monday was the spread between digital options and call options, and some traders are using early knock-outs to knock out options as a means of coverage. The foreign exchange strategy director refers to foreign exchange options contracts that will be suspended if specific barriers are hit within a specific short-term time frame.