Good morning. Market sentiment has turned markedly more optimistic on reports suggesting that Iran and Oman are nearing a deal to reopen the Strait of Hormuz. Under the arrangement being discussed, ships bound for the Persian Gulf would enter through Iranian territorial waters, while those leaving would exit through Omani ones. No “service fees”* would be levied during an initial 60-day provisional phase, though the parties have left open the possibility of charging them later. Brent crude is holding near $80 a barrel, down roughly 11% from Friday’s close, the Treasury curve is flattening, and North American bourses are set to open higher. Currencies, by contrast, are holding steady, with the dollar all but unchanged against its major counterparts.
Investors are alert to the risk that the agreement unravels once again, but have arrived at a number of conclusions that support current valuations. The first is that the Trump administration has no appetite for further escalation, wary of the damage another surge in energy prices could do to the Republican Party’s standing before November’s mid-term elections. The second is that Iran, having demonstrated that it can shut the Strait at will, has little reason to soften its demands for greater control and compensation. The third is that shipping firms and oil buyers will happily pay what are, in economic terms, negligible kickbacks—dressed up as charges for security, navigation, traffic management and emergency response—in exchange for safe and predictable passage. The upshot is that the TACO trade is giving way to SNAFU positioning.
Conviction in the dollar’s underlying strength remains low ahead of Friday’s non-farm payrolls report. Figures published yesterday showed labour demand cooling slightly in June: posted vacancies fell to 7.36m, from a revised 7.54m, though the ratio of openings to unemployed workers edged up to 1.04, from 1.03. Layoffs and discharges held at a very low 1.1%, while the quits rate—often seen as a proxy for worker confidence—stayed at an equally subdued 2.0%. With inflation showing signs of rolling over—a trend that a deal in the Middle East could reinforce—and job growth slowing to Goldilocks-esque levels, investors are less convinced that monetary tightening will come quickly: market-implied odds of a move at the Fed’s September meeting have slipped below 55%, from near-certainty before June’s rate decision. Cross-currency rate differentials are, accordingly, turning less supportive.
The Canadian dollar is slipping in line with crude prices—but its continued weakness may be less worrying than it appears. An update published yesterday showed the country’s merchandise-trade surplus climbing to C$3.9bn in June, a four-year high, as stronger gold exports more than offset a drop in energy revenues**. Exports to the United States rose for a fifth straight month, outpacing a sharp jump in imports of artificial-intelligence equipment***. Measured on a rolling two-year basis—far enough back to capture pre-trade-war levels—growth in underlying Canadian exports has returned to positive territory, suggesting that many of the factors weighing on the exchange rate are also translating into an improvement in competitiveness****.
Exports could weaken if the Trump administration makes good on its latest tariff threats in the weeks ahead. But our estimates suggest roughly 80% of Canadian products would still qualify for exemptions under the USMCA trade pact, leaving the effective tariff rate on Canadian goods among the most favourable of any US trading partner.
The yen’s response to the weekend’s coordinated intervention by Tokyo and Washington is already fading, underlining the strategy’s limits even as it keeps traders on edge. Having surged to a three-month high just above 155 to the dollar soon after Sunday’s Asia open, the currency has since surrendered much of that gain, trading around 157.6 this morning. That leaves it firmer than the 40-year low near 164 touched in late July, but well short of what the scale and rarity of the joint purchases led many observers to expect. The episode reinforces our view that intervention buys only a brief reprieve: it does nothing to close interest-rate differentials, to temper the fiscal loosening under Prime Minister Sanae Takaichi, or to stem the investor outflows that have driven the yen lower over a multi-decade timespan.
*Not, of course, to be confused with tolls.
**Both are unusually jumpy categories at the moment: shifting tariff expectations have opened up arbitrage opportunities in gold markets, while the war in the Middle East is generating extreme volatility in oil prices.
***It’s dangerous to read too far into trade data—it can be noisy, especially under current conditions—but these numbers are consistent with a pickup in business investment—the kind that should bolster output calculations in coming quarters.
****As a certain Gen X Canadian songstress put it, isn’t it ironic?