Latest on the US-Iran conflict
Equities rallied and oil dropped as US diplomatic efforts fueled cautious optimism that the Middle East conflict may begin to ease, tempering concerns over prolonged disruption.
According to the AP, Iran has received a 15-point proposal drafted by the US that outlines sanctions relief, civilian nuclear cooperation, a rollback of Iran’s nuclear program, missile limits, and shipping access through the Strait of Hormuz. However, Iran rejected the ceasefire proposal and called US talks “illogical,” according to the nation’s semi-official news agency Fars. Iran has signalled little willingness to compromise, claiming the US is essentially negotiating with itself while closely monitoring American troop movements. To that end, the US is preparing to deploy 2,000 troops to the Middle East, joining another 5,000 expected to arrive in the region in the coming days. The conflict’s ripple effects are also expanding globally: India is facing mounting pressure as the leader of the BRICS group to steer the bloc toward a firmer stance, and oil prices have slumped with Brent crude dropping below $100 a barrel, though it remains on track for a substantial monthly surge.
On the military front, the US and Israel estimate they have successfully destroyed about two-thirds of Iran’s missile launchers. Despite these losses, Iran has sustained its regional assaults, launching overnight attacks on Arab Gulf states and Israel with no reported casualties. Tehran has already fired more than 1,200 ballistic missiles and at least 3,300 rudimentary Shahed cruise missiles at targets around the Gulf. Furthermore, Iran is adapting its tactics by probing for weaker defenses or striking fewer military targets, utilizing its remaining stockpile of more advanced weapons to maintain offensive pressure in the region.
In FX, the dollar’s beta to oil remains far lower than in previous shocks; the US is considerably less dependent on Middle Eastern seaborne crude than Europe or Asia. As a result, today’s dollar strength is driven more by risk‑off flows than by terms‑of‑trade, making it inherently fragile if geopolitical tensions ease or markets conclude that the worst energy disruptions have already been priced.
CAD: Loonie falters amid Iran conflict
While military movements suggest an escalation, official statements hint at a surprising diplomatic opening involving energy exports through the strategic waterway. Regional allies are reportedly losing their patience with the current instability, especially as transit fees for tankers soar to historic highs. Despite the buildup of armed forces, there is a lingering hope that high-level discussions scheduled for later this week might finally resolve the month-long dispute.
This geopolitical uncertainty is creating a complex environment for global markets and fuel prices. Recent reports suggest that a potential agreement could involve significant concessions regarding atomic ambitions and regional security. However, the lack of concrete evidence for these claims keeps investors on edge as they weigh the possibility of a total leadership transition against a negotiated peace. These developments have direct consequences for resources-linked assets, which often fluctuate wildly during periods of international instability and shifting energy dynamics.
The Canadian Dollar has faced some selling pressure, trading at its highest since end of January as the soft internal outlook has come back to the spotlight after last week’s BoC’s meeting. The labor market has started the year in the backfoot and economic expansion is falling short of earlier projections, prompting a more cautious tone from market participants. The USD/CAD has weakened against the greenback, while government debt yields are mimicking global yields performance on sharp volatility and hawkish repricing sparkled after last week’s BoE and ECB. Traders have turned short-term bearish on the currency.
GBP: Rebound built on shaky foundations
Sterling has rebound sharply against all of its major peers this week, with standout gains against commodity-linked FX such as the NOK and AUD. This makes sense given the sharp fall in oil prices. The pound has also strengthened against safe haven peers like the CHF, but interestingly has also outperformed pro-cyclical and risk-sensitive peers like the SEK and EUR.
Part of this reflects the tentative signs of de‑escalation in the Middle East, which have helped restore risk appetite and naturally support sterling given its high‑beta characteristics. But the improvement in market sentiment appears to have unlocked the rates channel more cleanly too, allowing the BoE’s hawkish repricing to feed through into FX with greater force.
Ultimately, the hawkish repricing of BoE rate expectations has supported the pound via the yield channel. But we remain sceptical about how durable that support can be. Rate differentials are undeniably a key driver of exchange rates, yet the source of those rate expectations matters just as much as the level. In this case, the market is effectively pricing a tightening cycle born out of stagflationary pressure, not stronger UK fundamentals.
UK inflation data this morning landed exactly in line with expectations, but the details were less comforting. Services inflation — the BoE’s preferred gauge of domestic price pressure — came in slightly hotter than forecast, reinforcing the idea that underlying inflation persistence has not fully broken. Crucially, these figures reflect February conditions, before the Middle East conflict erupted and before the latest surge in energy prices began feeding into the outlook. In other words, the data offers a snapshot of the pre‑war disinflation path — not the world the MPC is now operating in.
MXN: The Peso follows global uncertainty
The ongoing dispute in the Middle East is creating a fragile environment for global markets, and Mexico is feeling the pressure. Hopes for a quick diplomatic fix faded after officials in Tehran rejected claims of active peace negotiations. The situation looks increasingly serious as neighboring nations consider stepping into the battlefield. Because nobody knows exactly what will happen next, financial players are getting nervous and searching for ways to protect their investments from sudden shocks.
This international uncertainty is clearly showing up in how people trade the Peso. While the actual exchange rate has been trading sideways, the most interesting action is happening behind the scenes. Market participants are rushing to buy insurance against a sudden currency drop, pushing the cost of these protective strategies to levels we have not seen in nearly 24 months. Data highlights a massive upward swing in hedging metrics, proving that everyone is bracing for a bumpy ride until the international dust settles.
Domestically, the picture is not offering much support for the currency. Recent numbers revealed an unexpected shrinking in national output at the start of the year, mostly dragged down by a struggling manufacturing sector. Even with a highly positive early start to North American trade agreement reviews, the combination of slowing local growth and climbing global energy costs puts policymakers in a tough spot. Ahead of Banxico meeting tomorrow, central bankers might need to maintain elevated borrowing costs to fight off new inflation threats coming from the energy shock.
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Calendar: March 23 – 27
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
