By Michael O’Neill

The carefully constructed fiction known as the rules-based world order didn’t just wobble last weekend. It was sucker-punched and stomped after Donald Trump authorized a massive joint U.S.–Israeli strike on Iran.

In a matter of hours, missiles, drones, and cyberattacks lit up targets across the country, killing Supreme Leader Ayatollah Khamenei and several senior political leaders. The strike opened a violent new chapter in a conflict that now stretches from the streets of Tehran to the waters of the Persian Gulf and directly into the veins of global financial markets.

The justification for the attack is dubious. Trump and his administration have framed it as a combination of executive war powers, pre-emptive self-defence, and the existential threat posed by a near-nuclear Iran. On March 2, Trump summed up the rationale in typical fashion: “I got him before he got me.”

A major concern to markets is “what is the end game?”

Trump earlier claimed the operation would last “four to five weeks.” Many observers are sceptical. History is littered with the wreckage of “clear objectives” that looked convincing on paper and collapsed the moment they collided with reality.

The 2001 invasion of Afghanistan is a textbook example. The mission was to exact revenge for 9/11, dismantle Al-Qaeda, and remove the Taliban from power. It was expected to take two months and initially looked like a smashing success. Then the Americans drifted into a prolonged counter-insurgency campaign and an ambitious nation-building experiment. Twenty years and roughly $2.3 trillion later, the last U.S. troops left Afghanistan. The Taliban are back in power, and Al-Qaeda never fully disappeared.

We are now on Day 4 of the new conflict.

Very few ships are attempting to transit the Strait of Hormuz, and those that do face the threat of drone attacks. Oil prices have surged more than 13% in five days and are up nearly 29% year-to-date. The U.S. dollar index has traded erratically in a 97.58–99.54 range since the end of February, while global markets have been thoroughly whip-sawed.

Cruel Winter

Canadians have had a cruel winter, and spring isn’t shaping up to be that great either, especially for financial markets. The US/Iran conflict isn’t helping. The domestic economy is already wobbling under the weight of tariffs and lingering uncertainty surrounding the future of the Canada–United States–Mexico Agreement (CUSMA). Businesses have been reluctant to invest, exporters are wary of committing capital, and cross-border trade flows have become increasingly politicized. Into that fragile backdrop comes a geopolitical shock that has jolted commodity prices and injected a fresh layer of uncertainty into currency markets.

The immediate effect has been the surge in crude oil prices. Canada is one of the world’s largest oil producers, and higher prices typically translate into improved terms of trade, stronger energy sector revenues, and a firmer Canadian dollar. In normal circumstances, the loonie would likely be rallying hard on a 13% five-day jump in oil prices.

But these are not normal circumstances.

Safe-haven demand for US dollars has surged as investors scramble for liquidity and security amid the escalating conflict. The result is a tug-of-war between oil-driven support for the Canadian dollar and broad-based demand for the greenback.

Complicating matters further is the fragile state of Canada’s economy. Tariff threats and ongoing CUSMA uncertainty have already chilled business confidence. Manufacturing exporters in Ontario and Quebec remain deeply exposed to U.S. policy shifts, while energy producers are grappling with both regulatory constraints and transportation bottlenecks.

Interest rate policy is another battlefield for currency markets. The Federal Reserve and the Bank of Canada have spent the last two years broadly moving in lockstep as they wrestled inflation lower, but the economic trajectories on either side of the border are beginning to diverge. The Bank of Canada has no interest in altering its monetary policy (yet), while the CME FedWatch tool projects two rate cuts by the Fed by year-end.

What to do?

Freewill

“If you choose to do nothing, you still have made a choice.” RUSH sang those lyrics in 1980, and they are appropriate for traders and treasurers today. When risk mitigation is the goal, sometimes the most effective strategies are the simplest.

One of the most common FX strategies is to use forward contracts. In an environment of elevated uncertainty across interest rate differentials, geopolitical risk premiums, and commodity-driven currency volatility, locking in exchange rates through forward contracts provides a known cost and removes the variable from the equation entirely.

Another popular choice is the use of an FX option product known as a Risk Reversal (or zero-cost collars). It is a simple trade that involves simultaneously buying an out-of-the-money option in one direction (i.e., a CAD put to protect against Canadian dollar weakness) while selling an out-of-the-money option in the opposite direction to offset the premium cost. Both are extremely common hedging products, and your favourite FX sales professional will be more than happy to help you get sorted.

Mitigating madness won’t change the headlines, but it can keep them from changing your bottom line