The Morning Update

The USD firmed, oil prices rallied, equity markets are down, and US yields are mixed on escalating Middle East tensions. The USD index strengthened from 3-year lows as Israel launched a wide-scale strike against Iran, which sparked Iranian retaliation. Global equity markets declined, while oil prices surged more than 6% and safe-haven gold prices rose over 1% as risk sentiment waned following airstrikes on Iran's nuclear programme and ballistic missile sites, heightening tensions in the Middle East and raising concerns that the situation could escalate into a larger conflict. "We are seeing classical risk-off moves," said Matthew Haupt, portfolio manager at Wilson Asset Management. "What we are watching now is the speed and scale of the response from Tehran. That will shape the duration of the current moves. Quite often, these moves fade after the initial shocks." Israel said the operation will continue for "as many days" as it takes to remove that threat, and Iran vowed to respond "harshly". The Israel Defence Forces says Iran launched more than 100 drones toward Israel in response. Alongside updates on the Israel/Iran tensions, investors will also monitor the US Michigan Consumer Sentiment index, UoM 1 & 5 year Consumer Inflation Expectations, and the G7 meeting this weekend to help provide direction to currency markets.

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In the news. Israel launches air strikes against Iranian commanders and nuclear sites. China delayed approval of the US chip merger of $35 billion amid Trump's trade war. Israel says Iran has launched 100 drones in retaliation. Secretary of State Marco Rubio says that the US was not involved in the Israeli strikes on Iran. House GOP narrowly approves $9.4 billion package of DOGE cuts to foreign aid and public radio. Meta finalizes $14.3 billion Scale AI investment and hires its CEO. India signals Modi likely to attend the G7 summit in Canada. Canadian firms flock to the government program to avoid layoffs amid tariffs. Foxconn sends 97% of India's iPhone exports to the US as Apple tackles Trump's tariffs.

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In currency markets. The USD index bounces from March 2022 lows, the euro breaks its four-day rally, and G20 currencies weaken as risk sentiment fades following the Israel strikes on Iran. CNY slips 0.1%, while Asian currencies weakened by 0.35% on average against the USD. Trading currencies are mixed, with ZAR, NZD, PLN & CZK tumbling 0.9%, AUD, MXN, CHF, JPY, DKK and SEK weakened by 0.7%, and NOK fell 0.3% against the USD.

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In commodity markets. Oil prices rallied 7.2%. Natural gas prices rose by 0.7%. Silver and Wheat prices strengthened by 1.2%. Silver prices firmed by 0.5%. Copper prices tumbled by 1.6%, and Soybean prices gained by 0.3%.

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CAD has eased by 0.2% in overnight trading amid a shift to the safe-haven USD following the attack on Iran by Israel. Israel. The loonie outperforms its peers, finding underlying support from rallying oil and gold. We anticipate investors will remain cautious and on the sidelines to see if Middle East tensions will escalate or de-escalate next. The focus is on updates on Middle East tensions, the US consumer sentiment report, and CAD Manufacturing and Wholesale sales to help provide direction for the loonie.

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EURCAD weakens as rallying oil and gold prices provide an underlying support to the loonie.

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EUR weakens towards 1.1500 amid a flight to the safe-haven USD due to escalating Middle East tensions. The euro weakened from multi-year highs, ending four days of strengthening as market sentiment shifted, sparked by Israel's attack on Iran's nuclear facility. The hawkish stance of the ECB and improving economic EU data should provide underlying support for the euro. Investors are expected to remain cautious amid increasing Middle East uncertainty, and the key US consumer sentiment report later today.

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GBPEUR edges higher as the euro extends losses as investors reposition despite the increasing prospect of further BoE easing in 2025.

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GBP finds support at 1.3500 amid risk-off sentiment. The pound weakened from 1.3630 to 1.3520 following Israel's attack on Iran, as investors turned to the safe-haven USD. Domestically, the UK Consumer Inflation Expectations, released by the Bank of England, are a percentage of consumers' expectations regarding the price changes of goods and services dropping to 3.2% over the next 12 months. The pound has edged off intraday lows as markets steady ahead of the Michigan Consumer Sentiment Index and further updates on the Iran/Israel tensions.