The start of the week saw significant market movement driven by developments in the Middle East, particularly regarding US-Iran relations. US President Donald Trump cancelled a threatened attack on Iran, citing that Middle Eastern allies had reached the parameters of a deal to end the ongoing conflict. Trump further stated that Iran and neighboring nations requested time to finalize a deal that would reopen the Strait of Hormuz and address Iran's nuclear program [1][2][3]. However, Iranian officials disputed these claims, with Mehrnews agency reporting that Tehran characterized the assertion as 'nothing but a new lie' and emphasized that Iranian military forces remain on high alert and fully prepared for any eventuality [2][3].
The easing of immediate geopolitical tensions led to a sharp decline in crude oil prices. This drop in oil prices exerted downward pressure on the Canadian Dollar (CAD), a commodity-linked currency, and provided a tailwind for the USD/CAD pair, which traded around 1.4030, up less than 0.10% for the day. The OPEC+ decision to increase oil production by 188,000 barrels per day in September further weighed on oil prices and the CAD [1]. The intraday slump in crude prices also eased inflation fears and tempered expectations for an immediate interest rate hike by the US Federal Reserve [1].
The US Dollar (USD) faced additional headwinds due to official confirmation from Japan regarding joint currency interventions, with the Bank of Japan reportedly spending up to $58.97 billion on yen-buying operations. This, combined with the easing of market risk aversion following the US-Iran developments, pressured the Greenback against major peers [2]. The USD Index (DXY) fell to its lowest level since June 17, warranting caution for USD/CAD bulls [1].
Commodity-linked currencies such as the Australian Dollar (AUD) and New Zealand Dollar (NZD) showed resilience despite weaker-than-expected Chinese economic data. China's RatingDog Manufacturing PMI fell to 50.9 in July from 51.7 in June, missing expectations of 51.5, but both the AUD and NZD maintained gains, supported by other factors such as domestic inflation and central bank expectations [2][3]. In New Zealand, market pricing turned more hawkish, with the swaps curve pricing in 60bps of hikes by year-end and a total of 100bps over the next twelve months, nearing the top of the RBNZ's estimated neutral range [3].
Looking ahead, market participants are focused on upcoming US macroeconomic releases, including the ISM Manufacturing PMI and crucial monthly employment reports from the US and Canada, which are expected to influence currency pairs in the near term. Developments in the Middle East remain a key source of potential volatility [1][3].
CONCLUSION
The cancellation of a US attack on Iran and hopes for diplomatic progress led to a decline in oil prices, impacting commodity-linked currencies like the Canadian Dollar. While the US Dollar weakened on multiple fronts, the Australian and New Zealand Dollars remained resilient despite softer Chinese data. Market attention now shifts to key economic releases and ongoing geopolitical developments for further direction.