Good morning. The dollar is steadying and measures of implied volatility are coming down after a week of turmoil that saw global equity markets tumble and oil prices surge past $90 a barrel for the first time in more than a month. After American forces launched a ninth consecutive night of strikes and Tehran carried out reprisals against ships and targets across the region, Iranian authorities said this morning they had received proposals from mediators aimed at de-escalating tensions. Brent is down slightly to $88 a barrel and West Texas Intermediate to $82, but both are up almost 20% this month as the Strait of Hormuz—through which roughly a fifth of the world’s oil and liquefied natural gas passes—remains effectively closed.
Speculators are beginning to pull back on long-dollar positions as rate differentials turn less favourable. Softer-than-expected labour-market and inflation data have eased expectations for a move at next week’s Federal Reserve meeting — markets are now pricing a 14% probability of a hike, down sharply from 55% late last month — and the projected trajectory beyond has flattened, with a single rate increase not fully priced before December. With Fed officials in their pre-meeting blackout and the US economic calendar thin this week, a further unwind in short bets against other currencies is possible.
The Canadian dollar is edging higher even after President Trump on Friday threatened to impose tariffs on the country in retaliation for its forest fires, accusing Ottawa of “wilful negligence” that he said was costing the United States billions of dollars a year. Traders view the threat—which would add pollution-related levies on top of existing duties—as more smoke than fire*, and are not adding to the risk discount embedded in the currency since the trade war between the two countries escalated last year.
This morning’s inflation report seems unlikely to provide a meaningful directional catalyst. Economists think the headline consumer price index rose 2.8% year on year in June, down from 3.2% previously, reflecting a sharp decline in energy costs, while underlying price growth—with food and energy excluded—remained very close to the Bank of Canada’s target, confirming that second-round pressures from the energy shock are not taking hold. Although a series of global supply shocks are raising import prices, the Canadian economy itself remains far too weak to generate demand-led inflation, giving policymakers room to stay on hold for longer.
The British pound is little changed ahead of Andy Burnham’s installation as prime minister later today, with investors expecting him to chart a relatively conservative fiscal course and appoint Shabana Mahmood—seen as a centrist—as chancellor. Tomorrow’s labour market release is expected to show unemployment edging up to 5%, while Wednesday’s June inflation figures are forecast to show headline price growth easing to 2.7% year on year from 2.8%. Traders see only a slim chance of a move at next week’s Bank of England meeting and have a quarter-point hike fully priced in by November, but surprises in the new prime minister’s communications strategy—or in the data—could shift the balance of opinion among both policymakers and market participants, impacting exchange rates.
Across the Channel, the euro is marking time ahead of Thursday’s European Central Bank rate decision. Investors are assigning less than a 15% probability to a move after bloc-wide inflation fell more than expected to 2.8% in June, with no evidence of second-round effects in the broader economy or of an unanchoring in inflation expectations. After this month’s rebound in oil prices, however, some policymakers may be tempted to deliver a second rapid-fire “insurance” rise, and the committee is likely to retain its hawkish bias. That, combined with a broad-based improvement in economic surprise indices—which measure the gap between forecast and realised data**—should help keep the common currency supported against the dollar.
*Yes. I know. I considered “more haze than blaze,” decided that was worse, considered cutting it entirely, and then decided that was cowardice.
**This does not imply that the economy itself is performing strongly. That is, the index rises when economists are wrong in an optimistic direction and falls when they’re wrong in a pessimistic one.*
***That this results in tradeable market moves is a reflection of John Maynard Keynes’s insight—he said “successful investing is anticipating the anticipation of others”.