Good morning. Oil prices and currency markets are stabilising after yet another escalation in the conflict between the United States and Iran left the status quo* in the Strait of Hormuz largely intact. In the aftermath of Tuesday’s Iranian attacks on shipping, President Trump said the ceasefire was “over” and authorised American forces to launch a second wave of strikes against Iranian targets last night, prompting Tehran to strike back at US facilities in Bahrain, Kuwait and Qatar. Global crude benchmarks are almost unchanged from yesterday’s close, Treasury yields are holding steady, and equity futures are pointing to an incremental recovery at the open.
Foreign-exchange traders have dusted off their early-war playbook—selling currencies associated with net energy importers and buying those of exporters—but moves have been relatively modest. This restraint likely reflects a belief that Washington and Tehran will keep talking and that oil will continue to flow through the strait, albeit at reduced volumes. With Trump reinforcing that view, telling reporters on Air Force One that Iran “called a little while ago, they want a deal so badly,” the dollar is holding firm while the euro, sterling, and yen are trading flat.
Federal Reserve officials were broadly as hawkish as expected at their June meeting, which took place before the US and Iran originally established their ceasefire. According to minutes released yesterday, most participants supported removing language indicating that the next policy move would likely be a cut, judging that upside risks to price stability remained elevated while downside risks to employment had moderated. Officials agreed that “some policy firming would likely be warranted” if inflation persisted, and a few thought the case for raising rates was already strong enough to act. Market reaction to the release was muted, with odds on a September hike holding near coin-toss levels, and policy-sensitive yields remaining well above levels implied in oil prices—suggesting that investors think elevated core inflation will play a more important role in driving the next tightening cycle.
The Canadian dollar has strengthened slightly this week in line with rising crude prices but remains in consolidation mode ahead of tomorrow’s labour market figures, which are expected to show job growth moderating and the unemployment rate stabilising in June after a surprisingly strong prior month. It’s not directly tradeable, given that lags can be long and variable, but the gap between US and Canadian unemployment rates—which has historically served as a reasonably strong predictor of future exchange rate performance****—is now arguably pointing to oversold conditions in the loonie.
Continued bearishness is certainly plausible: the Canadian economy continues to struggle with soft business investment, weak consumer sentiment, and below-trend growth. The loonie’s negative momentum could continue. But the USMCA negotiations are likely to preserve existing tariff structures, and business and consumer surveys look poised to show signs of improvement as infrastructure investment rises, regulatory barriers are lowered, and the country’s leadership pivots toward competitiveness. That, coupled with a moderation in US labour markets, could put the currency on an ascendant path sooner than its critics currently assume.
*Ronald Reagan: “Status quo, you know, is Latin for ‘the mess we’re in'”.
**”Expected” is doing a lot of work here. Given that Canadian unemployment reports make random number generators look good by comparison, no one places directional positions based on these forecasts*.
***Bet on the World Cup instead, at least you’ll enjoy some entertainment while losing your money.
****I’m highly indebted to BMO’s Doug Porter for pointing out this relationship many years ago.