- Markets jumped after news that Israel had attacked Iran.
- Safe-haven currencies like the Swiss franc and the yen rose sharply on Friday.
- Middle East tensions eased when Iran said it had no plans to respond to Israel.
Currency futures were mixed on Friday as markets digested the news that Israel had attacked Iran. Safe-haven currencies like the Swiss franc and the yen rose sharply before pulling back as the session ended. Although Iran confirmed the attack, the country eased market fears by saying it had no intention to strike back.
Meanwhile, risk-sensitive currencies like the Aussie and the Kiwi fell sharply before recovering. For days, investors had been on edge as they awaited a response from Israel after Iran’s attack. When the news finally came out, it created a lot of volatility in the market. However, calm soon returned when Iran said it had no plans to respond to Israel. Moreover, the attack had little impact, with Iran reporting small explosions.
Canadian dollar volatility (Source: Bloomberg)
The Canadian dollar responded similarly to safe-haven currencies as it rose with oil prices. An escalation of the conflict between Israel and Iran would have a significant impact on oil prices as it would dent supply. Iran is a major OPEC producer. Therefore, any conflict in the country would hamper oil distribution, pushing up prices. This would, in turn, boost the Canadian dollar.
However, the rate-cut outlook divergence between Canada and the US will likely keep a lid on further increases in the currency. Notably, data last week showed a bigger-than-expected decline in Canada’s inflation, confirming a clear downtrend. Meanwhile, progress in the US has stalled. Therefore, the Bank of Canada will likely implement its first rate cut ahead of the Fed.
Elsewhere, the pound fell after Bank of England deputy governor Dave Ramsden said the risk of UK inflation pausing above target had dropped. Markets took this as a sign that policymakers were confident in their progress toward lowering inflation. Therefore, there is a higher chance the Bank of England will be ready to cut rates before the Fed. Still, the recent decline in Fed rate-cut bets has similarly affected BoE rate-cut expectations.
Meanwhile, although the yen had a moment of strength on Friday, it remained at levels that could prompt a BoJ intervention. Core inflation data from Japan revealed a drop to 2.6% in March from 2.8% the previous month. Still, despite this, the Bank of Japan is ready to hike rates to support the yen. According to the central bank, a weak currency drives up import prices, which increases inflation.
