Oil Tumbles on Prospects of Strait of Hormuz Reopening

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

US Dollar        1.3680-1.3930

Euro                1.5950-1.6200

Sterling           1.8400-1.8650

WTI Oil (opening level) $87.00

The CAD/USD is opening at 1.3810 ( 0.7241 )

Oil fell to a five-week low after the US and Iran tentatively agreed to extend their ceasefire by 60 days, heading for its biggest monthly decline since 2020 on expectations the agreement could pave the way for a gradual reopening of the Strait of Hormuz. While significant hurdles remain, the market is reacting to the prospect of a supply surge once hundreds of tankers loaded with crude oil and refined fuels are released from the Persian Gulf. In the months ahead, however, demand to replenish depleted global inventories is likely to provide support, potentially lifting the price floor compared with pre-war levels.

Gold survived another attempt to break below its 200-day moving average, as technically driven short sellers were squeezed by improving prospects for a US-Iran deal. The easing of energy-driven inflation concerns helped push bond yields and the dollar lower, providing support to bullion. Having successfully tested this key support level twice during the conflict, gold remains caught in a challenging technical environment, with a break above USD 4,575 and ultimately the 50-day moving average at USD 4,628 needed to improve the near-term outlook.

Headlines

• The US side reports that the US and Iran have reportedly reached a tentative deal to extend a ceasefire by 60 days and launch further talks on Tehran’s nuclear program, raising hopes the three-month conflict could be nearing a resolution. The deal would allow unrestricted shipping through the strait without tolls or harassment. But as of Friday morning, nothing has been signed.
• US April PCE inflation rose 3.8% YoY, the highest since May 2023, driven by elevated energy costs. Core PCE came in at 0.2% MoM versus the 0.3% estimate, a modest positive surprise. Personal income was flat versus an expected 0.4% gain while spending rose 0.5%.
• US Q1 GDP was revised down to 1.6% annualised from the initial 2.0% estimate, below consensus expectations, driven by weaker consumer spending growth.
• Fed speakers struck a cautious but increasingly hawkish tone. St. Louis Fed's Musalem warned the real policy rate is below neutral, longer-term inflation expectations are drifting up, and a rate hike scenario exists if disinflation does not materialise within one to two quarters.
• The account of the ECB April meeting showed a number of officials saying that the decision to not hike was a close call and they would not have opposed a hike at that meeting. The accounts firmly point to a June 10-11 rate hike as priced by markets.
• Tokyo May CPI data out today saw across the board softer numbers than expected. The headline inflation came in at 1.4% YoY vs. 1.6% expected and 1.5% in April, while the ex-Fresh Food measure came in at 1.3% YoY vs. 1.5% expected and 1.5% in April and the ex-Fresh Food and Energy measure came in at 1.6% YoY vs. 1.8% expected and 1.9% YoY in April.

Key Points

• Equities: US records were led by AI infrastructure, Europe softened on geopolitics, Asia rebounded as ceasefire hopes lifted tech.
• Volatility: record highs, low VIX, upside skew
• Digital Assets: Bitcoin stabilising, ETF outflows
• Commodities: BCOM suffers monthly setback as crude and fuel prices tumble on ceasefire hopes; gold survives test of key support
• Fixed Income: US treasury yields fell Thursday, especially at longer end of the curve. Long-dated JGB’s rallied sharply Friday, sending yields lower.
• Currencies: USD weakens in line with crude oil price drop, price action sluggish. NZD and SEK strong.