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Commerzbank on Overnight News

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Commerzbank in its "European Sunrise" note of Thursday highlighted:

Markets: United States Treasuries fall after the Federal Reserve decision on Wednesday, with the curve flattening, partly reverse losses in Asia. E-minis only changed a little after rebounding in Asia. The euro (EUR) falls to US$1.152, the yen (JPY) is at its weakest level in nearly two years. Brent at US$78/barrel.

Fed keeps rates unchanged, removes reference to additional rate adjustments and drops easing bias in statement. Median 2026 rate dot rises to 3.75% from 3.375%, with nine of 18 participants penciling in a hike this year. Core PCE projection for this year raised to 3.3%, followed by 2.3% for 2027 and 2% for 2028. The statement says the labor market is keeping pace with workforce.

Fed: Chair Kevin Warsh says committee dropped forward guidance as it is "not well suited to this juncture." Announces five task forces (communications, balance sheet, data sources, productivity/jobs, inflation frameworks) that will begin to work within weeks and mostly conclude by year-end. Balance sheet task force to review ample-reserves regime. Sees no reason to revisit 2% target until achieved.

Trade: President Donald Trump says the USMCA trade deal "won't be sticking around," views it as possibly expiring immediately.

U.S.: Wall Street groups warn regulators that their plans to implement "Basel Endgame" will threaten U.S. Treasury market liquidity (FT).

U.S./Iran: President Trump signs the memorandum of understanding with Iran at Versailles and the deal is now in effect. Trump reiterates that Iran agreed not to produce nuclear weapons and talks on removing the enriched stockpile will begin immediately. The U.S. will only lift oil sanctions if Iran complies. If Tehran doesn't honor the agreement, the U.S. goes "back to bombing." Trump defends deal, saying that he sought to avoid "economic catastrophe" and "market collapse."

U.S./Iran: Official briefs that the deal gives the U.S. a "dial" tied to Tehran's behaviour, Iran won't charge fees for Strait of Hormuz transit within a 60-day period.

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Treasury

Berenberg Assesses the Economic Impact of The U.S.-Iran Deal

In their framework agreement to be signed on Friday, Iran and the United States have apparently left some key issues unresolved, said Berenberg.Examples seem to include the dilution or disposal of Iran's highly enriched uranium, the Israel/Lebanon issue, some details of long-term sanctions relief for Tehran and, possibly, the precise arrangements for managing the Strait of Hormuz in the future.However, chances are that both sides will want to avoid the pain of a new prolonged closure of the Strait of Hormuz, U.S. President Donald Trump probably even more so than Iran, noted the bank. A collapse of the deal, followed by a renewed surge in oil prices, could hurt Trump's Republicans badly at the midterm elections to Congress on Nov. 3.The structure of the deal, with a 60-day period for further negotiations, should make it easy to simply extend the deadline further and further if the two sides cannot settle their differences in time.Since late April, Berenberg has based its economic and financial forecasts on the assumption that the worst would be over by June. More precisely, the bank suggested that the price for dated Brent crude would fall from an average of US$120 per barrel in April to around US$90 in June and further to US$75 in January 2027.Berenberg now seems to be on track for that. Futures prices have receded to be roughly in line with the bank's oil price assumption. As a consequence, it sees no need to revise its economic or financial forecasts.For the last three months, Berenberg has argued that bond markets have overreacted to the surge in energy prices. Central banks won't tighten policy as aggressively as markets are pricing in.Unlike in 2021 and 2022, when the combination of an ultra-loose monetary policy and a V-reshaped economic rebound from the pandemic had paved the way for a major surge in inflation even before Russian President Vladimir Putin had launched his full-scale invasion of Ukraine, the potential for major second-round effects from the spike in energy prices and transport costs is low, added the bank.

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Treasury

The Canadian Dollar May Swing on USMCA Trade Review News, Says Rosenberg Research

U.S. President Trump's announcement last week that the United States will not renew the USMCA trade deal wasn't especially surprising, said Rosenberg Research.The agreement would remain in force until 2036, but the decision would trigger annual review periods, and it fits neatly within the U.S. administration's broader strategy of maximizing negotiating leverage, noted Rosenberg Research.USMCA is proceeding with a mandatory joint review, starting this July. The USMCA talks so far are showing minimal progress, with U.S. officials framing Canada as non-responsive. Changes to rules of origin, and specifically questions about the Chinese content of goods, have been a major theme of the negotiations.With their USMCA-compliance exemptions shielding them to some extent from the Section 301 tariffs, Canada and Mexico continue to have a competitive advantage relative to most other exporters in the U.S., providing some insulation from U.S. trade policy volatility.However, there are still vulnerabilities, stated Rosenberg. A U.S. refusal to renew the deal would leave the USMCA in force, but the reversion to an annual, rather than six-year, review process, and the exposure to mercurial swings in U.S. trade policy, would also present a sustained overhang that would weigh on international direct investment and domestic investment trends in Canada, with potential spillover effects on trade and employment.Canada's economy remains cyclically battered by the events of the last year and a half, along with poor structural growth to begin with. Jobs data has been volatile, with the May numbers showing a drop in unemployment from 6.9% to 6.6%, but the employment growth trendlines have been very poor over the last year, pointed out Rosenberg.For Canadian assets, the new reality is clear. Rosenberg expects some heightened market sensitivity for the Canadian dollar, and in particular, there is a "skew" to the potential market moves.Sudden setbacks in the negotiations will cause downside jumps in the loonie, while any gains will be incremental, according to Rosenberg.

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