US
Brent crude oil prices are holding above $100 a barrel, USD is mixed under 100.00, global sovereign bond yields continue to drift lower, and most stock markets are in the green. Market sentiment around the Iran war, as reflected in the Brent crude futures curve, remains anchored in a short-term energy supply disruption narrative. The curve is in clear backwardation. The front-end is pricing a meaningful war risk premium while contained longer-dated contracts imply limited concern about a lasting disruption to shipping.
We also lean towards the view that we may be closer to peak fear than to another leg higher in shipping security concerns. But our conviction is very low given US action so far appears more reactive than strategic. Moreover, Iran has both the capability and the incentive to keep disrupting shipping through the crucial Strait of Hormuz.
As such, long CAD and NOK on the crosses are good hedges against a more persistent energy price shock. Both Canada and Norway get the terms of trade boost and have fiscal space to absorb some of the growth drag to domestic demand.
The FOMC is widely expected to keep the target range for the funds rate at 3.50%-3.75% for a second straight meeting (6:00pm London, 2:00pm New York). Like all central banks, the Fed faces a familiar dilemma: look through the energy-driven inflation shock or lean against it and risk worsening the fragile US labor market backdrop.
The FOMC vote split, dot plot, and Fed Chair Jay Powell’s press conference will offer important clues on the Fed’s tolerance to a supply-driven inflation shock. The more dovish the vote split, dot plots, and/or Powell’s tone, the more it signals tolerance for near-term inflation. That would weigh on US real yields, and by extension USD.
Vote split: the base case is for a 9-3 vote to hold. Governors Stephen Miran, Christopher Waller and Michelle Bowman are seen dissenting in favor of a 25bps cut.
Dot plot: the FOMC median rate forecast is expected to still imply one cut for both 2026 and 2027, no change in 2028 and a longer-term rate of 3.0%. That would be in line with the Fed funds future curve.
Powell: watch to see whether Powell frames the energy shock as transitory noise or emphasizes concern about second-round effects and inflation expectations.
CANADA
USD/CAD is directionless around 1.3700. The Bank of Canada (BOC) policy decision is up first (1:45pm London, 9:45am New York). The BoC is widely expected to keep the target for the overnight rate at 2.25% for a third straight meeting and reiterate that “the current policy rate remains appropriate.”
We also anticipate the BOC to stress that it will tighten policy if the impacts of a shock on inflation are larger and more persistent. Encouragingly, Canada’s favorable inflation and inflation expectations backdrop give the BOC a small cushion to look through the oil-price shock and refrain from raising rates in the face of a worsening labor market.
BRAZIL
Banco Central do Bazil (BCB) is set to begin easing after keeping the Selic rate at 15.00% since the final 25bps hike in June 2025 (9:30pm London, 5:30pm New York). Two-thirds of the analysts polled by Bloomberg see a 25bps cut, the rest have a 50bps cut penciled. We lean towards a cautious 25bps cut to 14.75% given upside risk to inflation from rising energy prices.
