Good morning. The dollar is advancing against all its major counterparts as the conflict in the Middle East turns hot and the rout in global bond markets grinds on. The euro, pound, and yen are trading softer ahead of a raft of US data releases, including the monthly ADP employment print, durable goods orders, and Beige Book survey—none of which are typically market moving, but any of which might contribute to expectations for monetary tightening in the months ahead.

Oil prices are climbing after the US launched another round of strikes on Iranian targets—including two tankers—and Tehran said it had retaliated with drone and missile attacks on American facilities in Bahrain, Jordan, Kuwait and Iraq. Brent, the global benchmark, is trading near $95 a barrel, up sharply from a low near $71 in July.

Markets are growing less hopeful that a deal with Iran* will be reached before the November mid-terms. Where investors were once confident that sliding presidential approval ratings and rising prediction-market odds on a Democratic sweep of both chambers of Congress would push the Trump administration toward compromise, there now appears little prospect of that, and many are bracing for continued turbulence. In a post on Truth Social last night, Trump wrote that he likes “our position much better, with almost total control of the Hormuz Strait, and their economy totally collapsing,” adding that he is not trying to force Tehran to the table and “couldn’t care less” if it signs a deal.

With price relief growing less likely, a rate hike at the Federal Reserve’s September meeting is becoming more probable. According to an update published yesterday, the Institute for Supply Management’s manufacturing index slipped to a still-elevated 54.6 last month from 55.6 in July, and the accompanying commentary pointed firmly to inflation remaining well above target, with respondents citing the Iran war, volatile pricing, lengthening lead times, and tariffs, with many singling out rising costs for steel and aluminium inputs exposed to import duties. Another release showed job openings edging higher in July while layoffs fell, giving policymakers little reason for concern about the employment side of the central bank’s mandate. Fed funds futures are placing 65% odds on a September move, up from below 35% a week ago.

Global bond markets are coming under increasing strain. With debt levels at historic highs, sovereign and corporate issuance soaring, and investors demanding greater protection against inflation and fiscal risk, long-term interest rates are climbing worldwide. Ten-year Treasury yields are near a three-year high at 4.81%; their Japanese equivalents are close to a 30-year peak; and European rates are resetting to levels last reached in the late aughts. With central banks still unwinding their post-pandemic bond purchases*** and many poised to raise rates further, there is little to stop the rise in borrowing costs—short of a break in financial markets, that is.

Here in Canada, where the bond sell-off has been more restrained, the Canadian dollar is slipping ahead of this morning’s central-bank decision. The Bank of Canada is widely expected to stay on the sidelines for a seventh straight meeting as recent strength in employment and growth is overshadowed by the continuing breakdown in trade relations. Downside risks have grown: exports in targeted sectors are vulnerable to a contraction in the months ahead, and an increase in overall uncertainty could see consumers turn cautious while firms delay hiring and investment. There is a persistent drag, too, from a steadily deflating housing bubble; in inflation-adjusted terms, prices nationwide are down by 29.2% from their peak****.

Against this backdrop, we would be surprised to see the Bank move—in either direction—in the coming months. With roughly 15 basis points of tightening still priced into Canadian swap curves by year-end, rates—and the Canadian dollar—look vulnerable to a further (albeit incremental) dovish adjustment.

*One could add “Canada” to this sentence, and the meaning would be the same**.

**Yes, that’s more than a little crazy.

***There is, of course, considerable debate over the degree to which central bank quantitative easing programmes can influence interest rates. That debate won’t be resolved anytime soon. But it is clear that by avoiding new net purchases and continuing rolloffs, central banks are no longer engaged in meaningful yield suppression.

****This is a nationwide aggregate. Prices have fallen further in Toronto and Vancouver, and by less in markets where the post-pandemic run-up was less extreme.