Thinking post-conflict: FX mean reversion?
The conflict in Iran has triggered a clear flight to safety and a massive global energy shock, heavily skewing G10 currency performance. Since late February, the US Dollar Index (DXY) has surged punishing nearly all G10 peers with the notable exception of the Canadian Dollar (CAD). Buoyed by surging energy prices, CAD is practically flat, outperforming battered European currencies like the Swedish Krona (SEK) and the Euro (EUR).
Maybe it’s too early to think post-conflict, but, once the conflict reaches a resolution, a broader risk-on environment and a resulting decline in oil prices should theoretically trigger an unwind of the long-USD trade. In this mean reversion scenario, the hardest-hit currencies are poised to be the biggest winners. Based on historical sensitivity, the SEK offers the highest beta to a retreating Greenback. Safe havens and other European currencies like the Swiss Franc (CHF) and Norwegian Krone (NOK) also boast high betas, while the shielded CAD would likely lag the recovery.
However, the timing and trajectory of this mean reversion will largely be dictated by the physical realities of the global oil supply chain. While a diplomatic or military resolution might immediately improve broader market sentiment, restoring oil production, storage capacity, and shipping routes to pre-conflict levels is a complex logistical hurdle that could take weeks, if not months. Because of this, a significant “conflict premium” could remain stubbornly embedded in oil prices well beyond the actual cessation of hostilities. Consequently, while the ultimate unwinding of the long-USD position remains the most likely endgame, the transition may be a gradual grind rather than an immediate snapback, delaying the full windfall for high-beta currencies like the SEK until energy markets physically normalize.
Beyond the immediate unwinding of safe-haven flows, the market’s focus will rapidly shift toward assessing the broader economic damage and the stickiness of the conflict-driven inflation spike. Under a prolonged scenario, investors will be closely watching how the Federal Reserve, under the leadership of new Chair Kevin Warsh, navigates this complex backdrop and how markets subsequently reprice the Fed’s policy path.
CAD: Weak jobs report bodes ill for the Loonie
Last Friday, the USD/CAD broke above the 1.37 level following the release of a remarkably weak employment report. However, as hopes of a more constructive situation in Iran builds up starting the week, the US dollar has started soft on a combination of retreating oil prices and lower risk-aversion. While the Loonie has faced immediate pressure from the domestic data, it is important to note that, on a relative basis, the Canadian dollar continues to outperform its G10 peers.
This resilience is largely a byproduct of the ongoing conflict, which provides a geopolitical floor for crude prices and subsequently cushions the currency against the deteriorating macro backdrop. However, the underlying softness in the Canadian economy is becoming harder to ignore, as the current “conflict premium” acts as the primary shield for the currency.
The headline figures from the February report were undeniably grim, revealing a staggering loss of approximately 84,000 jobs, a massive miss compared to the modest 10,000-job gain markets had anticipated. This represents the steepest monthly decline in employment since early 2022, driven primarily by a collapse of 108,400 full-time positions. Although a small uptick of 24,500 part-time roles provided a minor offset, the sheer scale of the full-time exodus pushed the national unemployment rate up to 6.7%. This surge in joblessness is compounded by a dip in the participation rate to 64.9%, painting a picture of a labor market that is not only losing positions but also seeing a contraction in the active workforce as the employment rate hits a multi-month low.
Looking at the broader last year trends, a stark sectoral and geographic divide emerges. Data from the last twelve months reveals that national employment is effectively being propped up by the public sector, specifically Health Care and Social Assistance, which added 92,000 positions. Without this massive influx, the overall economic picture would be far more severe, as traditional private-sector drivers like manufacturing and wholesale trade have contracted by 51,800 and 33,400 jobs respectively.
This imbalance is mirrored provincially, where Alberta has emerged as the nation’s primary engine by adding 70,000 full-time jobs over the last year, largely thanks to the energy sector’s resilience. In contrast, Quebec has acted as the primary anchor on national performance, shedding more than 45,000 full-time roles over the same period and highlighting the uneven nature of this economic slowdown.
For the CAD, a post-conflict risk-on environment should see it lagging again on a relative basis, but well-bid as WTI oil prices sustain levels above $70 a barrel. The momentum, however, is unlikely to force a definitive USD/CAD breakout below the 1.35 threshold. The Bank of Canada (BoC) remains constrained by its own balancing act: weighing a deteriorating domestic labor market and a stagnant economy against renewed inflationary pressures of higher gas prices in the medium-term.
Looking ahead to the second half of the year, a more constructive scenario for the Loonie could emerge. If the energy-induced inflation shock proves temporary, allowing the Fed to proceed with a single rate cut while the BoC is forced to hike at least once, the CAD would be well-positioned to capitalize on the resulting divergence in cross-border yields.
EUR: Oil still calls the shots for EUR/USD
EUR/USD pared some losses yesterday on fragile market optimism after touching lows last seen in August 2025 near the 1.14 mark. A test of this level still looks likely this week, driven by another leg higher in oil and a more forceful bearish FX pass‑through from hawkish Fed signals than from a hawkish ECB. The rates‑driven FX pressure appears justified: an easing bias at the Fed means any hawkish recalibration tends to have deeper FX implications than the ECB’s stance, where roughly 40 bps of hikes are already priced in by year‑end – especially with both central banks expected to remain non‑committal at this stage.
That said, the dominant force on EUR/USD remains oil prices for now, with the influence of rate differentials on FX price action having diminished significantly since the conflict began. There is a mechanical push lower on EUR/USD due to heightened demand for dollars given their dominance in oil markets, but also a sentiment‑driven layer that weighs on the euro as hopes for a 2026 eurozone rebound – partly tied to Germany’s spending commitments – fade. The backdrop suggests that even if oil‑linked bearish pressure on EUR/USD eases as marginal USD demand dissipates, a more sluggish eurozone growth outlook as a result of a prolonged conflict would still dampen euro sentiment, limiting the scope for any meaningful domestically-driven rebound in the pair.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
