WE’RE NOW GETTING IN THIS MORE MODERATION STAGE.

Ongoing North American Free Trade Agreement negotiations, which are scheduled to conclude their seventh round Monday in Mexico City, remain a likely source of volatility for the loonie over the mediumterm. President Donald Trump’s announcement of duties on steel and aluminum March 1 helped fuel Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins are expected to tighten policy by another 54 basis points by year’s end. the loonie’s worst week in a year.

Canada has said it will strike back if the president includes them in the stiff tariffs. Senior U.S. trade advisers said Monday that Trump doesn’twantanynationexempted from the duties, set to be imposed as early as this week.

While Canada’s economy is coming off a stellar 2017, the country shed a net 88,000 jobs in January, its largest monthly decrease since 2009, while retail sales figures released last month showed receipts fell 0.8 per cent month-over-month in December. Friday’s gross domestic product figures did little to ease concerns of a slowdown, with data showing the economy growing at an annualized pace of just 1.7 per cent in the fourth quarter amid signs indebted households have begun paring spending.

“We’ve come off all this strength in the data,” Brittany Baumann, a macro strategist at Toronto Dominion Bank, said before the GDP figures were released. “We’re now getting in this more moderation stage.” Baumann expects the BoC to remain on hold for at least the next two policy meetings.

The loonie’s 3.2 per cent drop year-to-date is starting to leave its mark on the options market. Realized daily volatility has risen to the highest since September, and is nearly a full per cent above its implied counterpart as traders become increasingly concerned about the currency’s direction.

In a sign that they’re starting to price in BoC policy risk, currency puts traded this week expiring around the March 7 meeting outnumbered currency calls by about 50 per cent, according to Depository Trust & Clearing Corporation volumes. The one month 25-delta risk reversal, a barometer of sentiment and directional risk, is at its highest level since May as strikes above C$1.30 begin to accumulate. A move above this level would likely see volatility rise further.

“If the data is flagging a slowdown, then we should see a different tone from the Bank of Canada,” BlackRock’s Basdeo said. “That’ll cause the repricing of fixed income assets.”