Bank of America analysts report that historical episodes of disrupted oil supply have tended to produce a repeatable pattern in foreign-exchange markets: currencies tied to oil-producing economies usually strengthen, while those linked to energy importers generally lose ground.
The bank said that, so far, exchange-rate moves tied to the recent U.S.-Israel military operation in Iran have been modest and largely in line with expectations, including a broad strengthening of the U.S. dollar. BofA's review of prior geopolitical events that interrupted global oil flows found similar currency responses across the episodes it studied.
Observed currency patterns
Across both historical and implied oil shock scenarios, the analysts identified the Canadian dollar and the U.S. dollar as recurring outperformers. By contrast, a group of currencies tended to lag: the New Zealand dollar, the Australian dollar, the Swedish krona and, in some cases, the Japanese yen.
The analysts noted that the yen's occasional underperformance during oil shocks may stem from Japan's heavy dependence on imported energy. That reliance can offset the currency's usual role as a safe haven in broader market stress, the bank said.
Hedging opportunities and current volatility
BofA also assessed how currency-linked hedges have been priced relative to prior oil supply disruptions. Despite an uptick in volatility following tensions in the Middle East, the bank concluded that several hedging strategies still appear attractively priced when compared with levels observed in earlier oil shock events.
In particular, the analysts highlighted volatility in CADJPY and NZDUSD as potential areas of value. Positions in CADJPY could perform well in a scenario of higher oil prices that does not trigger widespread global economic spillovers. Conversely, short NZDUSD positions may serve as a hedge if the conflict proves prolonged.
While currency market volatility has risen, BofA noted that many hedge instruments remain below the volatility levels typically associated with past oil shocks. That gap suggests markets may be underpricing tail risks tied to escalation of geopolitical conflicts, according to the bank’s analysis.
Conclusion
BofA's historical analysis indicates a relatively consistent FX response to oil supply disruptions: oil-exporting economies' currencies tend to gain, while energy-importing countries' currencies frequently weaken. The bank identifies specific volatility instruments that may offer hedging value today, even as it cautions that some tail risks could be underpriced by current market levels.