The bank noted that currency markets have so far reacted moderately to the recent US-Israeli military operation in Iran, and price movements have generally been in line with expectations, including a general strengthening of the US dollar.

Bank of America's analysis of past geopolitical events that disrupted global oil supply shows that currency movements tend to follow a consistent pattern during such shocks. Currencies of oil-producing countries typically outperform, while currencies of energy-importing countries often weaken. In both historical and projected oil shock episodes, the bank found that the Canadian dollar and the US dollar typically outperform, while the New Zealand dollar, Australian dollar, Swedish krona, and occasionally the Japanese yen lag.

Analysts noted that the yen's occasional weakness during oil shocks may reflect Japan's heavy reliance on imported energy, which could undermine its traditional status as a safe haven asset during periods of market stress.

Despite the recent rise in currency volatility following tensions in the Middle East, Bank of America stated that several hedging strategies related to this dynamic still look attractively priced compared to past oil supply disruptions.

In particular, the bank highlighted CADJPY and NZDUSD volatility as potentially valuable. Positions in CADJPY could benefit from higher oil prices with limited global repercussions, while short positions in NZDUSD could act as a hedge if the conflict becomes more protracted.

Analysts added that while volatility in currency markets has increased, many hedging instruments remain below levels typically seen during previous oil shocks, suggesting that markets may still be undervaluing the tail risks associated with geopolitical escalation.