Renewed US-Iran fighting lifted crude prices and placed the Strait of Hormuz back at the center of oil market risks, with diplomacy over control of the waterway likely to determine whether tensions ease or persist, Macquarie said in a Wednesday note.
Unlike previous flare-ups, the latest conflict did not stem from the Israel-Hezbollah war and instead followed a broader US military response to Iranian attacks.
Macquarie said the dispute over control of the Strait of Hormuz now poses the biggest obstacle to a lasting peace.
Iran targeted vessels to discourage shipping from using alternative routes near the Omani coast after the US and its regional allies sought to reduce Tehran's leverage over the Strait by redirecting traffic away from Iranian-controlled transit channels, the note added.
The firm said traders should closely watch whether diplomatic efforts can produce a compromise over control of the Strait of Hormuz, arguing that any breakthrough would determine whether the conflict subsides or develops into a prolonged standoff.
Macquarie expects crude oil prices to remain the primary driver of broader financial markets, saying higher prices would likely support the US economy and the US Dollar as stronger oil exports help offset rising imports tied to artificial intelligence-related hardware demand.
The note said the Canadian Dollar failed to benefit from earlier strength in crude prices because uncertainty surrounding the 16-year renewal of the US-Mexico-Canada Agreement weighed more heavily on sentiment than improving energy fundamentals.
Macquarie said the failure to renew the trade pact by the July 1 deadline shifted the agreement into annual reviews that could continue until 2035, with termination possible in 2036 if the three countries fail to reach a new extension.
The firm said the US appears more willing to negotiate with Mexico than Canada, noting another round of US-Mexico talks is scheduled for the week of July 20, while formal negotiations with Canada have yet to take shape.
Macquarie said it does not expect the US to withdraw from the trade pact because doing so would also hurt the US economy. Instead, it sees negotiations continuing for at least another year, with temporary progress possible ahead of the November midterm elections.
Reflecting the weaker outlook for the Canadian Dollar, Macquarie raised its year-end forecast for USD/CAD to 1.38 from 1.33, citing uncertainty over the trade agreement and expectations of lower crude prices that have reduced the currency's near-term prospects.