Good morning. The dollar is advancing and oil prices are climbing after a fragile ceasefire between the US and Iran collapsed, endangering a nascent recovery in global energy supplies. A series of Iranian missile and drone attacks on commercial shipping yesterday prompted the United States to revoke a sanctions waiver that had allowed Tehran to sell oil on international markets and to launch more than 80 airstrikes against Iranian targets, which were followed by Iranian strikes across the Middle East. At the Nato summit in Ankara, President Trump said the ceasefire was over “as far as I’m concerned”, adding “I don’t want to deal with them anymore”. He plans to let his negotiators keep talking, he said, but “I think they’re wasting their time”.

Volatility is ratcheting higher once again. Both Brent and West Texas Intermediate are nearly 8% higher on the week, and energy-sensitive currencies are taking a hit as market participants hedge against a potential rise in import bills. Ten-year Treasury yields have risen almost 9 basis points since yesterday, global bond yields have jumped in sympathy, and equity markets are retreating as renewed inflation concerns intersect with an ongoing unwind in the artificial intelligence trade.

Traders are raising monetary-tightening expectations once again as the rise in oil benchmarks threatens to unleash another round of price pressures. A quarter-point rate hike from the Federal Reserve is now expected by October and from the European Central Bank by September, both earlier than previously anticipated. A Bank of England move is fully priced in by year-end, and the Bank of Canada is not far behind at nearly 80%.

This afternoon’s Fed minutes could add fuel to the hawkish shift, underscoring the extent to which inflation has supplanted labour market concerns in driving the central bank’s reaction function. The minutes themselves are stale — the meeting predated the Iran memorandum — but the consumer expectations they were responding to have not receded. The New York Fed’s latest survey shows households braced for 3.67% inflation over the next year, the highest reading since 2023 and above anything recorded in the decade before the pandemic. If oil prices fail to retreat over the coming months, those expectations could climb further, leaving the central bank with little choice but to embark on another tightening cycle.

It is worth noting, however, that this morning’s price action may not stick. Over the last 18 months, the Trump administration has followed a familiar pattern: issuing alarming threats, then walking them back in the face of market turmoil. Traders have generated vast profits from betting on these reversals—placing so-called ‘TACO’ trades—and a similar about-face* in the coming hours or days could easily reset monetary expectations and currency markets to pre-breakdown levels.

The euro is trading in line with its peers after Marine Le Pen was cleared to enter the 2027 French presidential race. Appeal judges upheld her conviction for embezzling European Union funds but reduced the accompanying election ban to 15 months—time she has already served—paving the way for her to lead the National Rally into the next campaign. The muted reaction suggests markets are less fearful of a Le Pen presidency than they once were: she no longer espouses leaving the euro or pulling France out of the European Union, and her party’s economic platform has drifted steadily toward the centre in recent years. For now, traders are treating the ruling as a domestic political event rather than a threat to the bloc.

Data published yesterday showed the US trade deficit widening sharply in May, with the gap in goods and services expanding 42.2% from the prior month to a seasonally adjusted $77.6bn. Exports fell 3.2%, led by a steep decline in gold sales to overseas buyers — a category whose volatile swings have distorted trade data for months — while imports rose 3.3%, boosted by strong demand for goods tied to the artificial intelligence buildout, including semiconductors and computer accessories.

Trading partners are shifting; imbalances are not shrinking. As trade theorists have long expected, although the protectionist policies implemented by successive US administrations have succeeded in redirecting supply chains away from China**, overall imports have risen sharply in line with growing consumer demand.

To wit, here in Canada, the merchandise trade balance recorded a surplus for a third consecutive month in May, the largest in four years. Exports climbed 0.9% to a record high, buoyed by a rise in goods shipped to the United States, while imports dipped 0.2%. Values have been flattered by elevated energy prices and gold arbitrage trades, but the underlying trend is real, with overall shipments up 21.5% from the same month two years ago. This underlines the irony in the current situation: by running the US economy hot, launching wars that raise oil prices, and issuing trade threats that keep the loonie under pressure, the Trump administration is effectively boosting Canadian exports.

*Or, simply, the expectation of one.

**Direct trade. It is difficult to imagine that the ongoing rerouting in supply chains does not involve a significant amount of transshipment, with Chinese goods landing in third countries for light reprocessing before moving to US markets.