Short-end traders are piling into wagers the Bank of Canada will turn dovish as erupting trade tensions shake market confidence in the outlook for future interest-rate increases.

The gap between September 2018 and December 2018 bankers’ acceptance futures narrowed to 14.5 basis points Tuesday amid record two-day volumes in the spread. Market participants are now pricing in just 41 basis points of additional policy tightening by year-end, down from more than 60 basis points as recently as last month. The Canadian dollar has declined in tandem, sliding 2.6 per cent against the greenback since the start of June.

Expectations for future BOC rate hikes are waning as the outlook for North American Free Trade Agreement negotiations grows increasingly fraught. President Donald Trump said again Tuesday that the U.S. has been “treated horribly” by its northern neighbor. Meanwhile, U.S.-China trade relations are faring no better, with Beijing threatening retaliation should Washington follow through on a pledge to impose duties on another $200 billion of Chinese goods. Anxiety over escalating trade tensions could slow the BOC’s tightening push, according to Canadian Imperial Bank of Commerce.

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“The decline in market-implied odds for July portend to concerns surrounding the global trade outlook,” said CIBC FX and macro strategist Bipan Rai, who still expects the BOC to hike next month. “As of now, you could talk us into a rate hike later this year, but that’s becoming a more difficult decision with trade risk.”

The odds of a rate increase at the BOC’s July 11 meeting have dwindled to about 67 percent, according to overnight index swap pricing, from roughly 80 percent in the aftermath of the bank’s May 30 meeting.

The Canadian dollar has tumbled more than 5 per cent versus the greenback in 2018, making the loonie the second-worst performing Group-of-10 currency in the span. It weakened to $1.3311 Wednesday, a day after Trump singled out dairy, energy and timber as sectors where Canada is taking advantage of the U.S.