Tensions Mount: Iran Considers Response to U.S. Attack

Today's expected range for the Canadian Dollar against the major currencies:

US Dollar        1.3650-1.3890

Euro                 1.5680-1.5930

Sterling            1.8330-1.8580

WTI Oil (opening level) $73.53

The CAD/USD is opening at 1.3778 ( 0.7258 ) 

The USD is flat against CAD counterpart on Monday, consolidating gains after an impulsive recovery from year-to-date lows at 1.3538 last week.

The USD appreciated more than 1% in the previous three trading days, with investors rushing for safe assets as risk aversion escalated as the US prepared this weekend's attack on Iran.

The risk-averse sentiment and the hawkish comments from Fed President Jerome Powell, following last week’s monetary policy decision, offset the positive impact of Crude oil’s rally in the CAD.

In the macroeconomic domain, Canadian retail sales figures failed to boost enthusiasm on Friday, with a smaller-than-expected increase in May. Excluding automobiles, sales of all other products contracted against expectations for the second consecutive month.

Beyond that, prices for industrial products contracted further in May, against expectations of a flat performance. All in all, figures that point to a soft economic growth in the second quarter, adding pressure on the BoC to ease interest rates further and weighing on the CAD.

The longer USD/CAD trend, however, remains bearish. The Dollar has depreciated by about 6.5% from February’s highs, weighed by the softer US economic data and the negative impact of Trump’s erratic trade policy.

Headlines

·    Trump announced the initiation of "Operation Midnight Hammer," which included targeted attacks on Iran's nuclear sites at Fordow, Natanz, and Isfahan. He cautioned that additional targets are still under consideration, stressing that while the US does not seek regime change, it is prepared to conduct more extensive strikes if Iran does not pursue diplomatic engagement. Later, Trump social media posts suggested that regime change may happen.

·    Iran's parliament reached a unanimous consensus in favor of closing the Strait of Hormuz after US strikes on nuclear facilities, pending security body approval. US Secretary of State Rubio warned it would be "economic suicide" for Iran but is a credible escalation. Yet the final decision lies with the Supreme National Security Council – Iran's highest security body.

·    The US June Philadelphia Fed Manufacturing Index remained unchanged at -4.0 in June 2025, matching May's figure and missing market expectations of -1. This suggests continued subdued manufacturing activity in the region, with signs of slowing demand and weakening labour market conditions.

·    Preliminary estimates indicate Canadian retail sales likely fell by 1.1% in May 2025, marking the steepest decline since March 2023. This suggests increased tariffs from the United States are prompting consumers to reduce spending.

·    FDI in China dropped 13.2% year-on-year to CNY 358.19 billion (USD 49.88 billion) from January to May 2025. Manufacturing attracted CNY 91.52 billion, services CNY 259.64 billion, and high-tech industries CNY 109.04 billion, with notable growth in e-commerce services (146%), aerospace and equipment manufacturing (74.9%), chemical pharmaceutical manufacturing (59.2%), and medical equipment manufacturing (20%).

Key Points

·    Equities: US-Iran tensions, stocks down, tech lags, triple witching

·    Volatility: VIX above 20, volatility high, options dilemma, Iran risk

·    Digital assets: Bitcoin <$101k, ETH weak, ETF outflows, macro-sensitive

·    Fixed Income: Japan announces long bond issuance ahead of auction

·    Currencies: USD rallies on risk aversion, JPY weakens most on changes to JGB issuance

·    Commodities: Muted crude response to US attack with focus on Iran’s next move. London copper squeeze continues