The US halted its two-week bombing campaign against Iran late on Friday, and Tehran paused retaliatory attacks on Washington’s regional allies for a second night. US ambassador to the United Nations Mike Waltz said forces remained “locked and loaded” while President Donald Trump considered allowing space for talks. Separately, shipping data showed traffic through Bab el-Mandeb fell on 26 July after Iran-backed Houthis in Yemen struck Saudi oil installations on the Red Sea coast, while transit through the Strait of Hormuz remained low over the weekend. Iran also accused Ukraine of attacking an Iranian commercial vessel in the Caspian Sea.
Markets reacted swiftly. Crude prices slid more than 5% at the week’s open, and weaker oil reduced inflation concerns, which in turn cooled expectations for US Federal Reserve rate rises, pulling the US Dollar from a monthly high retested last week. In broader positioning, “risk-on” typically coincides with rising equities and most commodities, plus stronger AUD, CAD and NZD, while “risk-off” tends to favour bonds, gold and safe-haven currencies including USD, JPY and CHF; minor FX such as RUB and ZAR also tend to firm in risk-on phases.
—Commodity and Energy Market Strategies
We suggest derivative traders capitalize on the recent 5% drop in crude oil, which has slipped following the pause in US-Iran strikes. While this sudden dip reflects short-term diplomatic relief, we expect energy volatility to remain high in the coming weeks. Traders should look at buying near-the-money call options on Brent crude to hedge against sudden supply shocks if negotiations stall.
Recent shipping data shows that vessel transits through the Bab el-Mandeb strait fell sharply on July 26 after Houthi attacks on Saudi coastal installations. With traffic through the Strait of Hormuz also staying low, the underlying physical oil market remains incredibly tight. We recommend utilizing bull call spreads on energy futures to position for a swift price reversal when supply realities override the temporary diplomatic optimism.
—Tactical Moves In Currency And Equity Markets
We are also witnessing a shift in currency markets, where the easing of inflation fears has pulled the US Dollar Index down from its recent monthly high. As a “risk-on” sentiment briefly returns, commodity-linked currencies like the Australian Dollar and Canadian Dollar present short-term buying opportunities. We favor buying short-term call options on these currencies against the greenback as the market tempers its US interest rate expectations.
Additionally, the cooling of geopolitical tensions has sparked a modest relief rally in major global equity indices. We advise traders to secure cheap protective put options on these equity gains, as the new front in the Caspian Sea introduces an unpredictable wildcard. Maintaining a balanced book with long volatility (VIX) options will protect portfolios if these fragile peace talks collapse in the coming weeks.
