US to impose more ranging sanctions against Iran. US-Canada trade war escalates, with the US to take auto tariffs up to 50%. Oil prices fall. US Treasury yields down modestly

Market movements have been modest at the start of the new week. There has been no follow-through from last week’s global bond market selloff, while the dollar debasement trade has paused, with the USD recovering a little of last week’s losses. The CAD weakened after the US-Canada trade war escalated.

As promised, US Treasury Secretary Bessent announced a fresh set of economic measures to punish Iran, as the US pivots away from military action in an effort to win the war. He described a “zero leakage approach” to sanctions, aimed at blocking every potential source of revenue that funds the IRGC, adding that “no one is above the reach of US sanctions”. He said President Trump is already calling world leaders with specific requests to cease their interactions with Iran.

Ahead of the announcement, Iran said it “will regard any country’s participation in or support for America’s war against the Iranian people as an act of war…not a single drop of oil will be exported, neither through the Strait of Hormuz nor from anywhere in the Persian Gulf.”

Oil prices have broken a positive six-day streak, with Brent crude falling 2½% since last week’s close to USD92 per barrel. Lower oil prices have supported the Treasury market, with rates moving lower, led by the long end of the curve. The 10-year rate is at 4.70%, down 4bps from last week’s close and just 1bp from yesterday’s NZ close. CNBC reported that the Treasury could use its nearly $1 trillion General Account to help fund its recently announced plans to increase purchases of long-dated government bonds, citing two senior Treasury officials. Tapping the TGA would provide the Treasury with more firepower than the previously announced buybacks.

The CAD has come under pressure following the breakdown of US-Canada trade talks over the weekend, which triggered new tariffs. In overnight developments, the tariff war escalated, with President Trump announcing an increase in tariffs on Canadian autos and steel to 50% from 1 January. The current auto tariff is 25% but applies only to non-US content. Steel is already tariffed at 50%. Of course, there is no guarantee the new auto tariffs will ever come into force, given Trump’s track record of withdrawing them at the last minute and, conveniently, the fact that the tariffs would take effect after the mid-term elections.

Canadian PM Carney emphasised the need to reduce Canada’s reliance on the US. On possible further retaliation, he was vague, saying Canada had a range of options and that “if we need to do more, we’ll see”.

The CAD has been the weakest of the majors since last week’s close, falling 0.7%. This sees USD/CAD up at 1.3850, while NZD/CAD has risen to 0.8250. Against a weaker risk appetite backdrop, the NZD and AUD sit near the bottom of the leaderboard. The NZD has slipped to just above 0.5950, while the AUD is about 0.7150. The USD is broadly stronger, reversing a little of last week’s chunky fall that followed the return of the dollar debasement trade. However, moves have been small, with JPY, GBP and EUR down only 0.1-0.2% from last week’s close. NZD crosses against these currencies are slightly weaker.

US equities are modestly weaker, weighed down by weaker IT stocks, led by a decline in semiconductor stocks. The S&P500 is down 0.2% in late afternoon trading, while the Nasdaq is down 0.5%.

The domestic rates market had a quiet session on Monday, with little trading activity. Global forces supported the market, with NZGBs marked down 2bps across most lines, while swap rates were marked down 2-3bps. The 2-year rate closed at 3.65% and the 10-year rate at 4.43%. A lack of movement in Australian bond futures overnight provides little directional bias for NZ rates at the open today. There was no reaction to data showing NZ real retail sales fell 0.5% q/q in Q2, breaking a strong run as fuel volumes plunged 13.1% due to surging prices linked to the Middle East conflict. Excluding the auto sector, sales rose 0.7% q/q, a solid result given the circumstances.

On the economic calendar today, there are only second-tier data releases, including Germany’s IFO survey and, in the US, new home sales and consumer confidence.

Jason Wong is the senior Markets Strategist at BNZ Markets.