Bank of Canada: Escalating trade war increases "disorderly" selloff risk, focusing on hedge fund leverage issue

The Bank of Canada warned that the ongoing tariff disputes have "disrupted markets," leading to an increased risk of "disorderly" selling, which will test the country's financial system. "The ongoing uncertainty in U.S. trade policy could trigger further market volatility and sudden asset repricing, potentially resulting in severe and sustained liquidity pressures," the bank said in its annual report on the Canadian financial system on Thursday. The Bank of Canada warned that if leveraged investors quickly unwind their positions, further price declines in assets could be amplified. The central bank noted concerns about the expansion of hedge funds' leverage levels in the Canadian government bond market. "Hedge funds must ensure they have the capacity to meet sudden liquidity demands without disrupting the normal functioning of the market," said Senior Deputy Governor Carolyn Rogers in her opening statement.