What happens in global markets rarely stays there.

A geopolitical development in the Middle East can quickly ripple through financial markets, affecting oil prices, shifting inflation expectations, influencing currency markets and ultimately impacting the cost of doing business for Australian companies.

For CFOs, finance directors and treasury teams managing international exposure, understanding how these market forces connect is critical.

Why geopolitical events matter to finance teams

Geopolitical events can quickly change investor sentiment. Conflict, political instability and disruptions to international trade routes can increase uncertainty.

Recent market movements demonstrate how quickly this can occur. During the early stages of the US-Iran conflict, the VIX, a widely followed measure of expected US stock market volatility, climbed as high as 30, according to the Financial Times.

For Australian businesses, this uncertainty affects commodity prices, exchange rates and international transaction costs, creating flow-on effects for margins, cash flow and financial forecasts.

How Middle East tensions affect global oil markets

The Middle East plays a significant role in global energy markets, meaning tensions in the region can quickly influence oil supply and prices.

The possibility of production constraints or disruption to major shipping routes can place upward pressure on prices.

For businesses, higher oil prices often flow through to transportation, manufacturing and logistics costs across global supply chains.

Unexpected increases in these costs can put pressure on margins and make budgeting and forecasting more difficult.

Why oil prices influence inflation and interest rate expectations

Oil is a major input across the global economy. When prices rise, businesses face higher production and transportation costs.

If these costs are passed to consumers, they may contribute to inflationary pressures and shape central bank policy, including whether interest rates may remain higher for longer.

Changes in interest rate expectations can also influence global currency markets.

How geopolitical tensions impact the US dollar

During periods of geopolitical and economic uncertainty, investors often move towards currencies perceived as safer or more liquid, with the US dollar historically viewed as a "safe haven" currency.

Expectations that US interest rates may remain higher can increase demand for USD-denominated assets. However, currency movements are influenced by a range of factors, meaning geopolitical uncertainty can contribute to increased FX volatility.

Tools such as Instantia’s Market Matrix can provide greater context around market movements and the factors influencing currency markets.

The impact on AUD and Australian importers/exporters

Periods of US dollar strength can place pressure on the Australian dollar.

For Australian importers purchasing in USD, a weaker AUD can increase the cost of goods, services and other international expenses, potentially putting pressure on margins and creating variances between forecast and actual costs.

Exporters may experience the opposite, with a weaker AUD potentially increasing the Australian dollar value of foreign currency revenue or improving international competitiveness. However, currency movements can still create uncertainty around future revenue and cash flow forecasting.

Instantia’s Risk Management Intelligence supports this process by bringing market data, hedging analysis and reporting together to provide greater visibility over currency exposure.

Practical steps finance teams can take to manage FX risk

Predicting geopolitical developments or short-term currency movements is extremely difficult. Effective treasury management is less about predicting markets and more about preparing for different outcomes.

Finance teams can identify exposures across international payments, receipts and forecast transactions, then use scenario planning to assess how different exchange-rate movements could affect cash flow and margins.

Instantia’s Strategy Builder supports this by allowing teams to develop and compare FX strategies and visualise their potential impacts.

Closing thoughts on staying informed and prepared

Geopolitical risk is difficult to predict, but businesses can control how prepared they are when markets move.

Understanding the relationship between geopolitical developments, oil prices, inflation, interest rates, the US dollar and FX markets gives finance teams greater context for managing currency exposure. The goal is not to predict exactly where markets will move next, but to understand the potential impact of different scenarios and have a strategy in place to respond.

For businesses with international exposure, preparation can provide greater clarity and confidence when volatility returns.

Speak with our team to learn more about how Instantia can help your business manage its foreign exchange exposure.