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After Saudi Arabia resumed its bombing campaign over Yemen yesterday, oil prices are sitting near a 2015 high this morning, with Brent trading at $65 a barrel while the West Texas flavour nears the $58 mark.

The loonie has taken flight in response, pushing toward a key psychological threshold as brightening economic hopes translating into the foreign exchange markets. Interest rate differentials between the currency and its all-important American counterpart have stabilized over the past week, with the Bank of Canada’s optimistic outlook helping to put a floor beneath overnight rates.

In contrast, the US dollar is trading with a distinctly softer tone, with market participants taking an increasingly wary stance ahead of next week’s Federal Open Market Committee meeting. A series of economic data disappointments over the past month have crushed expectations of an interest rate hike before September, and observers are concerned that dovish language could dominate the announcement and accompanying news conference – which would act to flatten the curve even more. This dynamic is helping to reverse the currency’s gains, and has contributed to a spike in global asset prices over the past month.

We suspect that a more cautious tone will indeed be in evidence, but that policymakers will ‘look through’ recent releases while maintaining a broadly positive outlook. Committee members are aware that first-quarter data out of the American economy has been surprisingly negative for most of the last decade, and will likely discount any lasting impact on growth outcomes. As such, it might be worth positioning for a slight market correction around the middle of next week.

The euro area is holding its ground quite nicely, with the common currency steadily recovering lost territory as worries about the Greek funding situation fade. Market participants are widely convinced that the cash-strapped country will agree to much-needed reforms with its creditors, helping it to secure additional funding and allowing it to make several critical debt repayments. In comments to the media yesterday, German Chancellor Angela Merkel said that all efforts must be made to keep Greece funded, and Prime Minister Alexis Tsipras suggested that negotiations were progressing nicely.

With equity valuations in nosebleed territory, bond yields at artificially low levels, and crowded trades everywhere in the foreign exchange world, it is wise to consider watching your tails. In an environment like this, small and unexpected tail risk events can trigger extraordinarily strong reactions – and devastate corporate balance sheets. While fixed-rate instruments like forward contracts may not seem attractive at current rates, tools like currency collars can be useful in mitigating the damage that an extreme event could cause. Talk to your trading teams about strategy.

In our latest podcast we take a deep dive into the various euro-zone issues, a look at China and a new trading education initiative

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