What’s Next for Iran, the Iranian Rial and the Ayatollah?

As U.S mid-term elections approach, the U.S President has been a particularly busy one by historical standards. The trade war with China, an apparent denuclearization agreement with North Korea, an about turn on relations with Russia, trade renegotiations with the EU, ongoing talks with Mexico and Canada and fresh sanctions on Iran being joined by the latest economic attack on Erdogan and Turkey.

While the past week saw the markets balk at the latest Trump move to free Pastor Brunson, there may be a greater game afoot.

Sanctions on Iran

Enemy number one for the U.S President has been Iran and chastising the hard-fought nuclear agreement during the presidential election campaign, which was an early warning sign that things were going to change and change they have.

Solidarity on Iran sanctions in the past had left Iran with very little wriggle room, but things have changed and that’s down to Trump’s clear intention to just ruffle the feathers of anyone and everyone in the apparent interests of the U.S.

It’s been 2-years since sanctions were lifted and Iran reentered the global arena, with Western companies eager to get a piece of Iran’s oil Dollars.

Things haven’t quite panned out the way the Iranian regime would have hoped, with the U.S President finally refusing to ratify the nuclear agreement that ultimately led to last week’s introduction of fresh sanctions.

While Iran may have quite comfortably moved on in life with the knowledge that it would be doing little to no business with the U.S, the U.S administration’s warning to both allies and foes of punitive sanctions on any country doing business with Iran has weighed on the Iranian’s economy with a November target date of zero oil imports for any nation an alarming one, for Iran at least.

Of greater concern for Iran’s heads of states will have been the ongoing trade war and Trump’s willingness to hit any nation with tariffs irrespective of historic ties.

For Iran, there are hidden dangers, but even more so for the regime that has been in power since 1979 and, while the EU and other global powers protest against the latest move by the U.S, Trump’s strategy will likely have one of two outcomes, one likely to be considered hugely positive for the U.S and the other, a disaster all around.

Is Iran Heading for an Economic Crisis?

The Iranian economy is in tatters, the Iranian Rial has collapsed to record lows against the U.S Dollar, most of the collapse coming through the summer over the planned roll-out of sanctions in August and inflation is sky high as once optimistic businesses face the prospects of another eternity in the wilderness.

Last time around the impact of sanctions was amidst a grueling war that cost Iran and neighboring Iraq a million lives. This time around, there is no war, just global economic growth, and prosperity for those sitting on the right side of the fence.

Reports of 100,000 protestors hitting the streets of Iran in the wake of the latest sanctions, calling for the death to a dictator, this time their very one, spells trouble. Unemployment, a reported 50% rise in the cost of fruit and vegetables and a 50% slide in the value of the Rial against the Dollar are the aftershocks of the U.S sanctions and what the U.S administration will likely be hoping to be the final nails in the regime’s coffin.

To make matters worse and certainly generate more anger on the streets of Tehran is the knowledge that oil prices have recovered to $70 plus levels a barrel and the Iranian government has enjoyed oil Dollar revenues and money from foreign investment for over 2-years, with a continued devaluation in the Rial since late 2013. The Rial has tumbled from IRR12,000 levels against the Dollar to IRR44,000 levels at the time of writing. Government exchange rates are not the rates that are available to the Iranian population, however, with unofficial numbers seeing 1 Dollar buying as much as IRR112,000, according to figures reported over the last few weeks.

The divergence between the official and street value of the Iranian Rial is all too clear for the Iranian people to see. While the official Rial has fallen from IRR36,000 levels to IRR44,000 levels this year, the street value has fallen from IRR44,000 levels to over IRR110,000 levels year-to-date, with plunge starting back in April.

Unsurprisingly, official inflation figures and implied annual inflation figures have also seen a material divergence, with street vendors racking up prices to meet with rising costs and the falling street value of the Rial.

As at the end of July, the implied annual rate of inflation was reported to have been sitting at over 200%, while the official inflation rate was reported to be sitting at just over 10%, the divergence in official and implied kicking in from January and accelerating as the year progressed.


Suggested Articles


What’s Next for Iran?

Sanctions on Iran’s oil industry don’t hit until November and already the country is in collapse and the Islamic regime has moved into close quarters, with even moderate Rouhani taking the cover of Supreme Spiritual Leader Ayatollah Ali Khamenei.

Moderate leader Rouhani’s return to the fold will likely anger the streets even more and with just a number of months remaining until oil sanctions hit, the Iranian regime’s only real choice is to hit the negotiating table and that goes against the very ethos of the spiritual leader’s stance on the U.S.

The alternative is to fight off a revolution domestically and further suppress the more vocal, while searching for ways to halt the slide in the Rial and address inflation, neither of which are going to be possible until Iran revises its current currency position and looks for an appropriate peg and more importantly, addresses the sanctions issue.

Does the West want another Iranian revolution and what would that mean to the current dynamics in the Middle East and ultimately on the price of crude oil?

Iran has played a meddlesome role in the Middle East and a domestic power struggle would certainly place it at risk of war, even with a Western appointed interim government or return of the exiled crown prince of Iran and son of the former Shah, Reza Pahlavi, who has been in talks with Israel and other enemies of the current regime for their support in a bid to return Iran to a monarchy.

Either way, it’s going to be a painful time and, the direction of the Rial will ultimately come down to stability in the coming months, continued unrest and a threat of a revolution likely to see further decline before steadying, while a return of Reza Pahlavi could lead to an immediate rally as the markets consider the likely close ties with the West and most importantly, the U.S.

For crude oil and possible supply disruption, it will ultimately boil down to how the current regime handles sanctions and whether the revolutionary guards fall back into the old habit of disrupting supply through the Strait of Hormuz. The current U.S President is unlikely to accept such antics, which could see the Islamic Republic face sterner action from the U.S and, for Trump the incentive would be to topple the regime. What a coup that would be…

Turkey and Erdogan under Pressure as the Turkish Economy Crumbles

It’s been a torrid time for a number of emerging economies, as the U.S President goes down his list of must-dos and, while the early days of the U.S Presidency saw North Korea, Iran, and China grab most of the headlines, Turkey has not been left unscathed.

The threat of U.S sanctions has riled the global financial markets and sentiment towards the Turkish Lira and 10-year government bonds and like any emerging economy, the exodus from government bonds has led interest rates to 20% this week, as the Turkish government looks to stem the tide of a mass pull out of much needed foreign investment into the country.

Unlike other economies, including Iran, Erdogan is unable to rely on exports alone, with the withdrawal of foreign investment and the threat of sanctions a taster of what could lie ahead for Erdogan, who is coming under increased pressure to release detained U.S pastor Andrew Brunson, the detaining of Brunson the ultimate cause of the threat to hit Turkey with crippling sanctions that could ultimately lead to a possible default on government debt and even worse, a bail out from the IMF that would likely leave Turkey in the wilderness for years.

While Brunson has been held captive since late 2016, the increased intentions of U.S President Trump to deliver on its promise to protect U.S citizens means that while some threats of sanctions may ultimately end up in finding common ground, the U.S President is unlikely to waver and will ultimately deliver on the threat should Brunson not be released.

One wonders whether Brunson is the sole motivation for the U.S administration, with Turkey has become a hotbed for terrorist activities, a number of high profile attacks in recent years have shocked the world, with Erdogan seemingly unable to or unwilling to take the fight to his immediate neighbors.

Thrown into the mix has been Erdogan’s election victory in June that came with new powers, shifting Turkey’s political landscape from one of a democratic parliamentary system to a presidential system, ultimately giving Erdogan total autonomy over what many have begun to consider a rogue nation.

While Erdogan may have suggested that the increased power over the country would ultimately deliver stability, following the 2016 coup attempt, and prosperity, the latest events and Erdogan’s failure to identify signals that have contributed to the current state of affairs will leave many wondering over what lies ahead for the ailing economy.

Year-to-date, the Turkish Lira is down a whopping 40.64% against the U.S Dollar and 10-year government bonds hit record lows earlier in the week, driving yields to 20% before easing back to around 18%.

While a Turkish delegate is on its way to Washington in attempt to appease a situation that could spiral out of control for the Turkish leader and ultimately the economy, the U.S administration may have other intentions, with a request to cut ties with U.S enemy #1 Iran likely to be on the list.

One thing is for certain, Trump will be looking to leave Erdogan in as much isolation as possible to avoid a reprisal down the road and with that in mind, it will be of particular interest to see how the Turkish President can turn things around and draw in foreign investment at an already challenging time.


Suggested Articles


The easiest solution would be to snuggle up to the U.S and become a true ally in the Middle East, though the very isolation would certainly rile Erdogan supporters at home and abroad, not to mention, leave the country more exposed than ever to reprisals from Middle East factions that could ultimately kill off what’s left of the Turkish tourist industry, once and for all.

Double-digit inflation, foreign currency debt, a surge in the cost of imports that Turkey depends upon for any goods that it delivers overseas and Erdogan’s unwillingness to allow the Turkish central bank to raise borrowing costs are a combination that paints a bleak picture and these are all before a possible meeting gone wrong in Washington.

Is a Strong Dollar Good for the US Economy?

China, Iran Russia, and Turkey are under Pressure

The threat of sanctions and tariffs from the United States puts pressure on a large part of developing markets. Chinese bourses are under pressure because of the threat of tariff wars. Iran is under threat of imposing sanctions because of the Iranian nuclear programme. Russia is vulnerable because of the suspicion of its interference in the elections. Turkey is under pressure because of the reluctance to release the American pastor. All these threats have already had an extremely negative impact on the business sentiments in the emerging markets, causing capital outflows and national currencies weakening.


Suggested Articles


Strong Dollar: Good or Bad?

The big question is whether such strengthening of the US dollar is favorable for the American economy or not. For the long-term distance, the answer is simple – «No».  This is exactly what the President and the U.S. Treasury Secretary have said in the past. Nevertheless, in the short–term the dollar’s growth could help to reduce the US inflationary pressure, avoiding even more abrupt tightening from the Fed. Moreover, it should not be forgotten that the American budget has a huge deficit, and the States actively attract market capital to finance it.

As one of many consequences, the USD receives additional demand due to the flow into the liquid U.S. Treasuries (UST), which is abundantly offered to the markets in order to finance the enormous fiscal deficit.

Coincidence or not, but the effect of the U.S. president’s active economic pressure on other countries is counterbalanced by the effect of the overgrown debt securities offer. As a result of the increased demand for safe-heavens, the yield for 10-years treasuries bond remains close to 3%, reluctant to grow higher, as it was widely expected earlier and despite the Fed Funds rate hikes and acceleration in inflation.

At the same time, strong macroeconomic data of the U.S. economy and company reporting support the positive dynamics of American stock indices. On Monday, S&P 500 added 0.3%, and the index futures add another 0.1% on Tuesday, reducing the gap from January’s historical highs to only 0.9%.

Among individual shares, it is worth noting the growth of Facebook shares. In the recent days, the stocks had stabilized after a collapse and now attract investors who are betting on the rebound after an excessive decline. Taking an important line of 200-day moving average and exiting the oversold zone for RSI also support the bullish sentiment among those investors who look at technical indicators. Twitter shares have not turned to rally yet, but technical indicators demonstrate this possibility.

This article was written by FxPro

Iran-U.S. Tension Headline Could Be a Bull Trap

Crude oil is trading higher on Monday, but is it really being driven higher by the launching of “an offensive of speeches and online communications meant to foment unrest and help pressure Iran to end its nuclear program and its support of militant groups?” Or is the start of a 24-hour strike on three oil and gas platforms in the British North Sea driving prices higher?

The price action early Monday tells me that the strike is having a bigger influence on the market then the Twitter attack by President Trump. After Trump responded to aggressive talk from Iran late Sunday, the market barely moved.

Furthermore, Iranian Supreme Leader Ayatollah Ali Khamenei on Saturday backed a suggestion by President Hassan Rouhani that Iran could block Gulf oil shipments if its exports were stopped. This was old news. Traders priced in this possibility a few weeks ago. If this was fresh news, the market would’ve opened much higher than it did and it would have rallied earlier in the session.

Nearly a month ago, the Trump administration threatened to slap sanctions on countries that don’t cut oil imports from Iran to “zero” by November 4 as part of its plan to further isolate Tehran both politically and economically. Oil prices immediately jumped on the news.

Over a week ago, the Trump administration softened its stance and offered to consider some exemptions to allow buyers of Iranian oil time to reduce their oil imports.

In between, Saudi Arabia and Russia said it would provide additional supply, driving prices lower.

If the Trump administration was serious with its threats then it would’ve taken the exemptions off the table. And since they didn’t, today’s price action probably represents short-covering rather than aggressive speculative buying.

Additionally, the crude oil market tends to react strongly to actual supply news rather than speculative events. Take for example last week’s sell-off when it was announced that Libya will increase output. Sellers waited for the actual event.

Today’s strike news is an actual event and it is likely to lead to minimal supply disruptions. Nonetheless, the strike is real. The aggressive banter between the U.S. and Iran has been going on a long time so oil traders have gotten used to it.


Suggested Articles


I don’t think the oil market will move substantially higher until there is an actual supply disruption caused by warlike efforts from Iran. So try to avoid chasing the market higher based on the comments from Iran or the tweet from President Trump. It could be a bull trap.

Given that the current short-term rally began last Wednesday with reports of bigger gasoline draw by the U.S. Energy Information Administration and the news later in the week that Saudi Arabia would be lowering exports in August, I believe that these events combined with the strike news are actually carrying prices higher at this time. These are real events and the Iran-U.S. tension is a speculative event. With the current tightness in crude oil supply, the “real” supply disruptions are having a bigger effect on prices than today’s speculative headline.

How will U.S. Sanction on Iran Impact on the Global Markets?

While there are many words that may be used to describe Donald Trump’s tenure as U.S. President, ‘dull’ is certainly not one of them. A list of his recent endeavors definitely makes for interest reading, from initiating a trade war with China to withdrawing from the controversial Iran Nuclear Deal struck by his predecessor Barack Obama back in 2015.

Essentially, this deal compelled the Iranian government to limit its nuclear ambitions, in exchange for the removal of the economic sanctions that had previously been improved on the international stage.

In this article below, we’ll explore the aftermath of Donald Trump’s decision to withdraw from the agreement and reimpose sanctions, while asking how this is impacting on the global financial markets.

The Iran Deal – What we Know so Far

In truth, Trump has been critical of the Iran Nuclear Deal ever since his 2016 election campaign, claiming that the nation is continuing to build a nuclear program despite providing no evidence to support this assertion.

He has remained on the attack throughout his tempestuous Presidency, so it came as no surprise when he officially withdrew from the agreement earlier this month. At the same time, Trump pledge to reimpose previously lifted sanctions on the Iranian economy, which will be rolled out in line with 90 and 180-day wind-down periods.

In doing so, of course, he has broken cover from his European allies, many of whom have been critical of the move (particularly in the current geopolitical climate). In fact, the leaders of the other five nations that brokered the original agreement back in 2015 expressed their disappointment at the decision, including French President Emmanuel Macron and Theresa May.

Unsurprisingly, Russia also expressed their dismay at the decision, although deputy Russian ambassador Dmitry Polyansky confirmed that his political colleagues were less than surprised.

There is a wider issue developing, however, with the U.S. also pledging to sanction any nations that refuse to decrease or cease their trade with Iran after the final wind-down period. The EU is taking drastic steps to negate this issue, by reviving legislation that will enable European companies to continue their current volume of trade with Iran while remaining immune to American sanctions.

This so-called “blocking statute” will elevate tensions between the U.S. and the EU, and there’s no doubt that this could place a huge strain on the global economy and financial markets.


Suggested Articles


How will These Developments Impact on the Financial Markets?

For now, of course, the markets have responded relatively well to the withdrawal of the U.S. from the Iran deal and their supposed trade war with China, thanks to a combination of deterministic trader outlooks and the fact that so much of Trump’s administration consists of smoke and mirrors.

In fact, stock and bond markets have both enjoyed gains since the announcement, while oil has experienced two significant price hikes as a result of Trump’s anti-Iran rhetoric.

Premium crude prices soared by $1.24 to $70.15 per barrel when Trump initially discussed the withdrawal back in March, while confirmation of the decision in May helped Brent oil to achieve a four-year high of $80 per barrel. These hikes have been largely inspired by the fact that the reintroduction of sanctions will reduce Iran’s oil trade, diminishing the global supply and placing a greater emphasis on demand.

While this is great news for investors and day traders with access to online trading platforms, the climate could change quickly if the EU does indeed to undermine the U.S. and negate sanctions. The US currently does have a financial connection to Iran and Europe may be worried that an escalation of the conflict can slow down its economy.

But after all, Trump is not a man who responds well to any kind of public challenge, and this could well lead to an economic impasse that has a more damaging impact on the global economy.

Eastern Stability: How Might Improving Relationships with China, Israel, and Korea Affect the Forex Market?

This is what is known as ‘geopolitical risk’. With today’s markets more interconnected than ever, traders from major forex platforms must pay close attention to geopolitical events if they want to mitigate the risks.

How Geopolitical Events Influence Forex?

The forex market is huge. It grew to a peak trading volume of $5.3 trillion in 2013 but has dropped slightly since then. Bank of International Settlements (BIS) data from 2016 reveals that 5.1 trillion USD is traded each day. In terms of volume, the USD is by far the most traded currency and it accounts for 88% of the forex market’s turnover. As the largest economy in the world, geopolitical events have a profound effect on the USD, which in turn affects other currencies.

Brexit is a good case in point. Following the EU independence referendum in the UK in 2016, the USD gained 10% against the GBP. The USD has also been affected by the Trump presidency. Trump’s protectionist foreign policies have caused the USD to slump in recent months; the more the president tweets his crazy viewpoints, the worse it gets.

Improved Stability has a Calming Effect

Looking beyond the US, there are a number of interesting developments in the wider world that could impact on the forex market in a big way. And, with relationships between the US and China, Korea and Israel getting better by the day, improved stability in the east is certain to have a profound effect.

The US is the biggest kid in the schoolyard, so any changes in America’s relationship with North Korea, China, and Israel has a knock-on effect on the forex market. Greater stability in the region has a calming effect on the notoriously volatile currency markets.

 

The US and North Korea

Pyongyang’s nuclear ambitions and Kim Jong-un’s inflammatory rhetoric have been the source of much anxiety in recent years, but finally, it seems the Kim Jong-un is ready to make peace with his closest neighbor, South Korea, and the US. It may be because sanctions are biting deep – we will probably never know the true reasons behind Pyongyang’s willingness to play nice – but there is no doubt that China, South Korea, and most other nations can sleep easier knowing Kim Jong-un no longer quite so trigger happy.


Suggested Articles


America Vs. China

America’s relationship with China is also a complex one. China and the US are each other’s biggest trading partners. The US imported US$45,788 million in January of this year and exported USD9,835. As you can see, there is a huge trade deficit, which President Trump is keen to address. Ideally, he would prefer to block cheap Chinese imports, but that is an unrealistic proposition. The trade deficit has caused tension between China and the US dating back to 2012. President Trump sought to smooth the waters when he unveiled the ten-part agreement between Beijing and Washington last year. Then in March this year, he then announced sweeping trade tariffs on contentious Chinese imports. The Chinese soon retaliated. Traders don’t take such announcements well and the USD slumped at fears of a trade war looming. Improving relations between Beijing and Washington should help to reverse this effect.

US Relations with Israel

Relations between the US and Israel are currently very good, but Trump’s withdrawal from the Iran nuclear deal has Israel on high alert. If tensions in the region continue to rise, which is likely judging by news in recent days, we could see some significant volatility in the forex market.

The biggest fear right now is that deteriorating relations between Israel and Iran could spark further conflict in the region. If this happens, volatility in the forex markets is the least of our worries.

How Are US Sanctions Affecting Global Markets?

With tensions continually rising over Syria, it looks as though there may well be further developments between all countries involved in the coming months. Any US sanctions could well have significant consequences for global markets and investors. Here are some of the effects they may have.

Iranian Oil

Iran is one of the main oil producers in the world, and the Iranian oil industry forms a significant part of its overall economy. Oil prices have already been rising as a result of the threat of US sanctions against Iran, with many investors clearly banking on more sanctions being imposed.

If oil prices do continue to rise, then OPEC pacts may well ease off as oil-producing countries take advantage of the higher prices. This, however, could serve to worsen the current oversupply which has been keeping prices down for the last few years.

Russia

Some of the US’ most heated exchanges have been with Russia, who it criticises for supporting the Syrian government. Sanctions imposed earlier this month against Russia have already instigated volatility in Russian markets, and this could continue for some time if political relations continue to be turbulent.

The rouble continues to decline versus the US dollar, suggesting that further sanctions could have an enduring effect on the Russian economy. Oil is also one of Russia’s major exports, so sanctions could also harm the Russian oil industry in the same way they may harm Iran’s.

Investor Sentiment

Those using online brokers like Oanda to invest in their chosen markets will no doubt be apprehensive given the current situation, as volatility pervades the economies involved. It is difficult to accurately predict how far the US will go with its sanctions, but they certainly seem to be having the desired effect.

Some investors may well try to take advantage of the current volatility by stocking up on assets which may shoot up in value as a result of sanctions (e.g. oil, aluminum, gold). Investor behavior will likely be based on whether political solutions to the current global problems can be found, or whether relations will continue to worsen between the US, Iran, and Russia.

Nuclear Deal

The Nuclear Deal between major world powers and Iran, which has given the latter sanctions relief in return for it curbing the nuclear program, is now under threat. If relations continue to worsen, it is fair to say that any renewal of this deal will be in serious danger.

This could cause further investment caution with regards to Iranian assets, depending on which companies would be targeted by sanctions. It could also serve to damage the value of Iranian stocks if investors are significantly dissuaded from investing in them.

Ultimately, US sanctions are having a profound effect on global markets, and this could continue for the foreseeable future. The threat of further sanctions, as well as the deterioration of relations between the US and Russia/Iran is likely to be influencing investor behaviour, and it could be the case that divides continue to widen.

Despite this, some Russian oil companies have actually been performing fairly strongly as sanctions have raised the price of oil. This may raise the question of how effective sanctions are in achieving their purpose, and whether dialogue may be a better solution to the current conflicts.

This article was written by Vanessa Bastos