While global equity markets are moving in a consolidative fashion after yesterday’s rally on the back of the Greek agreement, hydrocarbons are struggling this morning after another landmark deal has been inked. The ongoing negotiations between Iran and six world powers (the U.S., U.K., China, Russia, Germany, and France) have come to a successful conclusion, with Tehran accepting strict limits on its nuclear activities for 10 years in exchange for the lifting of international sanctions. The abolishment of international sanctions will allow Iran to increase their oil exports dramatically, with production returning to 2012 levels of 500k barrels per day. Unfortunately for Tehran the lifting of sanctions won’t take place overnight, with analysts estimating it could take 6-12 months before the international community is satisfied Iran has fulfilled its obligations under the new treaty. Regardless, for an already oversupplied market, oil futures initially took another leg lower in anticipation of increased supply hitting the market, though the full brunt of the new supply won’t likely trickle through into energy markets until it is reasonable to assume Iran is taking the necessary steps to comply, along with the nuclear deal having to pass through a Republican controlled Congress that has vowed to fight the deal. Should Congress in Washington vote to overturn the deal with Iran, the presidential veto could be used, but it is likely there will be a good amount of Sabre-rattling in Washington leading up to the vote. Texas-Tea and it’s heavier international counterpart initially traded with a slight offer tone this morning, though both WTI and Brent have manage to pull off their earlier lows as the weakness is faded. Commodity currencies are also feeling the sting of lower oil prices, with the CAD, NOK, and RUB all initially moving lower against the big dollar after news of the nuclear deal crossed the wires.
Focusing attention across the pond, the British pound is rallying against both the euro and the greenback this morning, seeing bids lifted as expectations for the first rate hike from the Bank of England are brought forward. The strength in the pound hasn’t been from the slightly disappointing consumer price figures that were released earlier this morning, as CPI on a year-over-year basis fell from the 0.1% registered in May to 0.0% in June, but rather comments from Governor Carney that suggested the rate tightening cycle is getting closer to beginning. Carney did temper his comments somewhat by suggesting the rate tightening cycle will take a more gradual trajectory than a similar one in the United States, and that the reaction in the housing industry would have to be taken into consideration. Similar to the situation he faced heading up the Canadian central bank, Carney will be tasked with balancing frothy housing markets in certain areas while at the same time trying not to choke off consumer demand by raising rates too rapidly. Regardless, Carney’s comments this morning have sparked a rally in the pound that has seen GBPUSD move higher by over a big figure.
Heading into the North American open, the downward pressure on the greenback seen overnight has intensified after retail sales for the month of June in the US missed expectations by a wide margin. Economists had been expecting a slightly lower pace of improvement after the upside surprises seen in May, yet the headline reading ended up falling by 0.3%, on expectations of a 0.2% increase, while May’s number was revised from a 1.2% increase to only a gain of 1.0%. The retail control group that feeds into GDP figures also came in on the soft side of estimates, edging lower by 0.1% after the 0.7% gain registered in May. As a result, the loonie has managed to recoup all of its overnight losses on the back of the Iran deal, pivoting right around the unchanged mark as we go to print. Tomorrow’s Bank of Canada decision is likely to heighten volatility in USDCAD post-decision, and while we don’t think the Canadian economy is at the point where additional insurance via another rate cut is warranted, even with rates on hold, the language in the policy statement that could suggest easier policy later in the year could hit the loonie with renewed selling pressure. Make sure to speak with your dealing teams ahead of tomorrow’sannouncement on how to capitalize on what is likely to be an interesting day in loonie trading.
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