Investing.com — Historical oil supply shocks have tended to benefit certain currencies, particularly the U.S. dollar and Canadian dollar, while weighing on others such as the New Zealand dollar and Australian dollar, according to Bank of America analysts.
The bank said foreign-exchange markets have so far reacted modestly to the recent U.S.-Israel military operation in Iran, with price action broadly matching expectations, including a general strengthening of the U.S. dollar.
BofA’s analysis of past geopolitical events that disrupted global oil supply shows that currency performance tends to follow a consistent pattern during such shocks. Oil-producing economies generally see their currencies outperform, while currencies of energy-importing countries often weaken.
Across both historical and implied oil shock episodes, the bank found that the Canadian dollar and U.S. dollar typically outperform, while the New Zealand dollar, Australian dollar, Swedish krona, and sometimes the Japanese yen underperform.
Analysts noted that the yen’s occasional weakness during oil shocks may reflect Japan’s heavy reliance on imported energy, which can offset its traditional safe-haven status during periods of market stress.
Despite the recent rise in currency volatility following Middle East tensions, BofA said several hedging strategies linked to these dynamics still appear attractively priced relative to past oil supply disruptions.
In particular, the bank highlighted CADJPY volatility and NZDUSD volatility as potentially offering value. CADJPY positions could benefit in a higher oil price environment with limited global spillovers, while short NZDUSD positions may act as a hedge if the conflict becomes more prolonged.
The analysts added that although volatility across currency markets has increased, many hedges remain below the levels typically observed during previous oil shock events, suggesting markets may still be underpricing tail risks tied to geopolitical escalation.
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