Good morning. The dollar is inching higher and risk appetite is faltering after Tehran attacked shipping in the Strait of Hormuz while the US maintained its blockade of Iranian ports and seized an Iranian-flagged cargo vessel, casting doubt on market expectations for an imminent peace deal. Global oil prices are back up, bond yields are pushing higher, equities are setting up to snap a five-day winning streak, and currency markets are broadly in risk-off mode, with the safe-haven Swiss franc, Japanese yen, and dollar generally outperforming their commodity-sensitive counterparts.

But bullish dollar positioning could have further to unwind. According to a snapshot captured last Tuesday and reported on Friday, speculators reversed bearish bets against the euro in the prior week but remained crowded into shorts against the Canadian dollar, pound, yen, and Australian dollar*—suggesting that a renewed easing in Middle Eastern tensions could see most majors outperforming the greenback.

Here in Canada’s frozen wastelands**, inflation pressures intensified slightly less than feared last month, reinforcing the case for a patient approach from the Bank of Canada. Data released by Statistics Canada this morning showed the headline consumer price index climbing 2.4% on a year-over-year basis in March, accelerating from the 1.8% gain increase recorded in February on a 21.2% jump in gasoline prices—but missing the 2.6% expected in markets. Core inflation—which strips out food and energy prices—and is computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 2.25% over the same period last year, down from 2.30% in the prior month. Swap-implied odds on one rate hike by year end are slipping, reflecting hopes the Bank will prove willing to follow its long-standing playbook in “looking through” changes in volatile commodity prices as it sets policy.

The report nonetheless underlines the paradox that has defined Canadian economic policy for decades: what enriches energy-rich provinces simultaneously taxes consumers and manufacturers elsewhere. With export prices hovering around a cyclically-high $88 a barrel in Canadian-dollar terms, producers in Alberta and Saskatchewan are generating healthy cash flows, provincial royalty revenues are swelling, and the upstream sector is drawing in workers and capital that will ripple into housing, retail, and services. That same price strength, however, is a burden for the rest of the country—consumers feel it at the pump and in heating bills, while businesses face steeper input costs for fuel, petrochemicals, and plastics. If core price measures defy our expectations in beginning a sustained acceleration, policymakers at the Bank of Canada may be forced to adopt a tighter monetary stance than sluggish demand in central Canada would otherwise warrant.

Contradictory forces could intersect in the days ahead. On the data front, tomorrow’s US retail sales report is expected to show headline spending jumping in line with higher gasoline prices, while “control group” sales—with gas stations, autos, food services, and building materials stores excluded—are seen coming in substantially weaker, helping justify dovish views on US rate settings. In the UK, the employment and inflation numbers set to land tomorrow and the next day could show labour markets resuming their softening trend even as inflation accelerates, putting the Bank of England in a tough place.

Traders will also seek to extract monetary policy signals from the noise when Kevin Warsh faces senators in tomorrow’s Banking Committee hearing on his nomination to replace Jerome Powell as the head of the Federal Reserve. Procedural hurdles—notably Republican Thom Tillis’s threat to block progress over the administration’s probe into the Fed’s building costs—could still derail the timeline, but if it goes ahead, Warsh will face questions on his commitment to central bank autonomy, his plans for reforming the institution’s operating structure, and his willingness to cut rates at the president’s behest. How he answers will shed light on what his intentions are—and on the degree to which he might manage to sway the rest of the committee toward his views.

*Note that this chart shows positions against the dollar, so a net negative value represents a long dollar/short foreign-currency position, while a positive value represents a short dollar/long foreign-currency position.

**It snowed yesterday in Toronto, and I am quite bitter about it.