Currency markets are set for a jolt when trading resumes this afternoon, though the reaction may prove less dramatic than the weekend’s headlines might suggest.
US and Israeli strikes on Iran have sent missiles arcing across the Middle East and claimed the life of Supreme Leader Ali Khamenei, prompting celebrations in Iranian cities. Yet for all the pyrotechnics, the military campaign appears calibrated to avoid the kind of escalation that would force a wholesale repricing of risk assets.
American and Israeli forces are conducting what military planners often describe as “lawn mowing” operations—hits on missile infrastructure and targeted assassinations of senior regime officials carried out from the air, but seem intent on avoiding putting boots on the ground. This approach could destabilise the country’s leadership, but stops short of upending the broader strategic picture, with the Revolutionary Guards and affiliated paramilitary groups—like the Basij militia—retaining their grip on power. After recent crackdowns, there are no credible reports emerging of the kind of organised revolution or civil war that could lead to the regime’s collapse.
The distinction matters for markets. Brent crude futures look poised to jump by at least 10 percent when they reopen this evening, a significant move, but hardly the kind of supply shock that would accompany a full-blown conflict in the Persian Gulf. Shipping through the Strait of Hormuz has paused, though largely as a precautionary measure by shipowners and insurers rather than in response to Iranian naval action. Three attacks on tankers have been reported so far, at least one of which appears to have been a false-flag operation by Iran itself. Crucially, there are no signs of Iranian fast boats harassing commercial vessels or minelayers putting to sea.
That backdrop points to a contained move in foreign exchange. We expect a modest bid in the US dollar and Swiss franc at the open, paired with limited softness in the euro and yen. Both currencies are negatively exposed to higher crude prices but also stand to benefit as carry trades and funding transactions are unwound. Sterling is likely to edge lower.
The Canadian dollar’s gearing to crude prices has diminished in recent years, and North American benchmarks—more influenced by domestic shale production—will not track Brent’s moves one for one. Any rally in the loonie should therefore prove modest.
The bigger question is whether investors will commit serious capital to a flight-to-safety trade. We think that enthusiasm for the trade will be limited to the retail segment while professionals remain cautious. The calculus is straightforward: although there are good reasons to allocate more money to safe assets, President Donald Trump could collapse the risk premium by declaring victory at any moment, and few portfolio managers want to be caught long dollars and short risk into a presidential tweet announcing that the mission has been accomplished.
Should Iran lash out—targeting energy infrastructure in the Gulf or escalating its attacks on shipping—the arithmetic could change rapidly. Brent would have further to run, safe-haven demand would intensify, and the orderly repositioning currently priced in would give way to something considerably less comfortable. For now, though, market participants should treat this as a crisis with an off-ramp.