EURIRR long EURO IRANIAN RIAL Bulls attacking again
Since the United States’ 2018 withdrawal from the Join Comprehensive Plan of Action (JCPOA), it has become clear that Iran’s economic woes—especially its currency devaluation—are strongly correlated with key political and geopolitical events. The volatility in the exchange rate and Iran’s currency depreciation are signs of an unhealthy economy.
The enormous depreciation of the rial against other currencies over the past decade illuminates the deterioration of Iran’s terms of trade versus the rest of the world. A country’s exchange rate is an indicator of its economy’s performance and terms of trade with the global economy. Therefore, with better terms of trade, a country can export more sophisticated products and reach the path of sustainable development, experienced in many (re-)emerging and industrial economies.1 Iran’s trade balance should improve as a result of the nominal depreciation of a currency, making exported goods cheaper and leading to a rise in total exports. However, due to the rial’s depreciation, Iran’s imported goods become more expensive, leading to a decrease in imports. Yet, Iran depends on importing many sophisticated products such as pharmaceuticals, medical devices, and machineries—and a currency depreciation mostly results in more expensive supply of these products.
In addition, a high volatility of a country’s exchange rate usually causes instability in terms of trade. Iran’s exchange rate has been depreciating with a strong volatility during the past three years (see Fig. 1 below). This has caused a so-called asymmetric adjustment shock on the trade balance due to the rial’s persistent depreciations, and shortages and high prices in the supply of goods to Iran’s market.2
Iran’s national currency is one of the main indicators of Iran’s economic health, and since January 2018, the rial depreciated enormously against the U.S. dollar by 450 percent, from 42,880 rials to one U.S. dollar to 318,560 rials on October 18, 2020. While this is the market rate, major imports are financed by the official rate, which is fixed at 42,000 rials per USD from March 2019. The first major depreciation of the rial began in the months leading to the U.S. withdrawal from the JCPOA in May 2018 (see the orange vertical line in Fig. 1). In September 2018, the Central Bank of Iran (CBI) implemented measures to allocate currency for major imports through export revenues, using the official exchange rate (the blue vertical line in Fig. 1). This hindered the depreciation of the rial in the second (unofficial) market only for a short period, and the depreciation path again continued until Tehran lifted limits on its uranium enrichment on May 8, 2019 (the brown vertical line in Fig. 1). Then, the rial was slightly appreciating until November 13, 2019. On November 14, 2019, the Iranian administration cut the gasoline subsidy, which triggered massive nationwide unrest followed by a brutal crackdown. Since then, the rial has continued to lose value.
The U.S. “maximum pressure” campaign has decimated Iran’s oil exports, falling from 2.6 million barrels per day (bpd) in May 2018, to between 600,000 and 700,000 bpd for much of the current year.3 Despite the recent increase in hydrocarbon exports, Iran’s hard-currency revenues remain extremely strained, as problems in repatriating these funds persist. Iran has increasingly exported products and manufacturing to neighboring countries to finance its own imports. However, due to the coronavirus pandemic and border closures with neighboring countries, even these exports have been limited. As a result, Iran’s currency reserves are shrinking due to the reduction in exports, resulting in a substantial trade deficit. The CBI and the administration, which control these reserves, tried hard to keep the trade surplus for decades. Iran had enjoyed a current-account surplus until 2012, when international and UN sanctions paralyzed its international trade. The surplus had accumulated in currency reserves, but access to these reserves was impeded by international sanctions in 2012 and since 2018 by U.S. secondary sanctions. However, Iran relies heavily on imports, from primary livestock feed and food, to technologically highly advanced products like raw and bulk medicine, electrical appliances, ICT equipment, machineries and capital goods, and pharmaceutical equipment. Therefore, with the shortcomings of hard/foreign currency in Iran’s market, there is a direct push on demand for foreign currency to import needed products.
RISING GEOPOLITICAL TENSIONS
The second reason behind Iran’s troubled economic conditions is increasing geopolitical tensions. In addition to the hard-currency shortfall due to lack of export revenues, the International Atomic Energy Agency (IAEA) Board of Governors’ resolution against Tehran’s NPT (Non-Proliferation Treaty) Safeguards Agreement is another factor behind the depreciation of the rial. The first critical resolution against Iran since 2012, it lamented the “denial of access to two locations specified by the IAEA under the Additional Protocol and continued lack of clarification regarding Agency questions related to possible undeclared nuclear material and nuclear related activities in Iran.” Following the passing of the resolution, the rial encountered another sharp depreciation against the USD. The IAEA resolution prompted a capital flight through dollarization in the second market. This recalls a similar pattern following a previous IAEA resolution in October 2012. In May 2012, the market exchange rate was about 15,750 rials per USD—after the October 2012 resolution, the rate doubled to around 33,000 rials per USD. This was one of the sharpest depreciations of the Iranian currency over recent decades.
The Iranian rial hit another negative record in its value against the USD in September 2020, selling for 273,000 rials on the unofficial market, the day after President Trump announced that all UN sanctions on Iran were re-imposed. Again on October 1, Iran’s currency reached yet another new record low, standing at 300,000 rials against the U.S. dollar. Confirming the connection between the rial’s devaluation and geopolitical events, Abdolnaser Hemmati, governor of the CBI, said that the Trump administration’s September 29 announcement to “completely cut off Iran’s financial system” with a fresh set of sanctions had a “psychological effect” on the country’s foreign-exchange market. However, Hemmati also expressed optimism for the repatriation of some of Iran’s frozen assets (notably $3 billion from Iraq for electricity and gas exports as well as $7 billion from South Korea for crude oil exports), although without providing any concrete details.
Conversely, recent geopolitical events have had a positive impact.
The COVID-19 pandemic has deteriorated Iran’s already ailing economy, yet the country’s economic crisis is rooted in factors beyond the pandemic’s fallout. Since the United States’ 2018 withdrawal from the Join Comprehensive Plan of Action (JCPOA), it has become clear that Iran’s economic woes—especially its currency devaluation—are strongly correlated with key political and geopolitical events. The volatility in the exchange rate and Iran’s currency depreciation are signs of an unhealthy economy.
The enormous depreciation of the rial against other currencies over the past decade illuminates the deterioration of Iran’s terms of trade versus the rest of the world. A country’s exchange rate is an indicator of its economy’s performance and terms of trade with the global economy. Therefore, with better terms of trade, a country can export more sophisticated products and reach the path of sustainable development, experienced in many (re-)emerging and industrial economies.1 Iran’s trade balance should improve as a result of the nominal depreciation of a currency, making exported goods cheaper and leading to a rise in total exports. However, due to the rial’s depreciation, Iran’s imported goods become more expensive, leading to a decrease in imports. Yet, Iran depends on importing many sophisticated products such as pharmaceuticals, medical devices, and machineries—and a currency depreciation mostly results in more expensive supply of these products.
In addition, a high volatility of a country’s exchange rate usually causes instability in terms of trade. Iran’s exchange rate has been depreciating with a strong volatility during the past three years (see Fig. 1 below). This has caused a so-called asymmetric adjustment shock on the trade balance due to the rial’s persistent depreciations, and shortages and high prices in the supply of goods to Iran’s market.2
Iran’s national currency is one of the main indicators of Iran’s economic health, and since January 2018, the rial depreciated enormously against the U.S. dollar by 450 percent, from 42,880 rials to one U.S. dollar to 318,560 rials on October 18, 2020. While this is the market rate, major imports are financed by the official rate, which is fixed at 42,000 rials per USD from March 2019. The first major depreciation of the rial began in the months leading to the U.S. withdrawal from the JCPOA in May 2018 (see the orange vertical line in Fig. 1). In September 2018, the Central Bank of Iran (CBI) implemented measures to allocate currency for major imports through export revenues, using the official exchange rate (the blue vertical line in Fig. 1). This hindered the depreciation of the rial in the second (unofficial) market only for a short period, and the depreciation path again continued until Tehran lifted limits on its uranium enrichment on May 8, 2019 (the brown vertical line in Fig. 1). Then, the rial was slightly appreciating until November 13, 2019. On November 14, 2019, the Iranian administration cut the gasoline subsidy, which triggered massive nationwide unrest followed by a brutal crackdown. Since then, the rial has continued to lose value.
Figure 1 – Development of the nominal exchange rate between the U.S. dollar and Iranian rial
Iran’s economic crisis remains heavily connected to its enmity with the United States. The best tool for economic diversification and sustainable development is an end to the four decades of animosity between Tehran and Washington.
Source: TGJU – Financial Markets Network
THE “MAXIMUM PRESSURE” CAMPAIGN
However, this depreciation of the rial against the USD is neither unprecedented nor unexpected. Iran has lost a great deal in export revenues due to the secondary U.S. sanctions re-imposed almost two years ago in May 2018. These secondary sanctions penalize firms from third countries that engage in business and trade with Iran. Thus, sanctions do not allow Iran to export easily. According to the World Bank, Iran’s economy is forecast to contract by 5.3 percent in its third year of recession, mostly due to the COVID-19 pandemic. Therefore, by the end of 2020, the size of Iran’s economy will be less than 83 percent of its 2017 level prior to the U.S. withdrawal from the JCPOA.
The U.S. “maximum pressure” campaign has decimated Iran’s oil exports, falling from 2.6 million barrels per day (bpd) in May 2018, to between 600,000 and 700,000 bpd for much of the current year.3 Despite the recent increase in hydrocarbon exports, Iran’s hard-currency revenues remain extremely strained, as problems in repatriating these funds persist. Iran has increasingly exported products and manufacturing to neighboring countries to finance its own imports. However, due to the coronavirus pandemic and border closures with neighboring countries, even these exports have been limited. As a result, Iran’s currency reserves are shrinking due to the reduction in exports, resulting in a substantial trade deficit. The CBI and the administration, which control these reserves, tried hard to keep the trade surplus for decades. Iran had enjoyed a current-account surplus until 2012, when international and UN sanctions paralyzed its international trade. The surplus had accumulated in currency reserves, but access to these reserves was impeded by international sanctions in 2012 and since 2018 by U.S. secondary sanctions. However, Iran relies heavily on imports, from primary livestock feed and food, to technologically highly advanced products like raw and bulk medicine, electrical appliances, ICT equipment, machineries and capital goods, and pharmaceutical equipment. Therefore, with the shortcomings of hard/foreign currency in Iran’s market, there is a direct push on demand for foreign currency to import needed products.
RISING GEOPOLITICAL TENSIONS
The second reason behind Iran’s troubled economic conditions is increasing geopolitical tensions. In addition to the hard-currency shortfall due to lack of export revenues, the International Atomic Energy Agency (IAEA) Board of Governors’ resolution against Tehran’s NPT (Non-Proliferation Treaty) Safeguards Agreement is another factor behind the depreciation of the rial. The first critical resolution against Iran since 2012, it lamented the “denial of access to two locations specified by the IAEA under the Additional Protocol and continued lack of clarification regarding Agency questions related to possible undeclared nuclear material and nuclear related activities in Iran.” Following the passing of the resolution, the rial encountered another sharp depreciation against the USD. The IAEA resolution prompted a capital flight through dollarization in the second market. This recalls a similar pattern following a previous IAEA resolution in October 2012. In May 2012, the market exchange rate was about 15,750 rials per USD—after the October 2012 resolution, the rate doubled to around 33,000 rials per USD. This was one of the sharpest depreciations of the Iranian currency over recent decades.
The Iranian rial hit another negative record in its value against the USD in September 2020, selling for 273,000 rials on the unofficial market, the day after President Trump announced that all UN sanctions on Iran were re-imposed. Again on October 1, Iran’s currency reached yet another new record low, standing at 300,000 rials against the U.S. dollar. Confirming the connection between the rial’s devaluation and geopolitical events, Abdolnaser Hemmati, governor of the CBI, said that the Trump administration’s September 29 announcement to “completely cut off Iran’s financial system” with a fresh set of sanctions had a “psychological effect” on the country’s foreign-exchange market. However, Hemmati also expressed optimism for the repatriation of some of Iran’s frozen assets (notably $3 billion from Iraq for electricity and gas exports as well as $7 billion from South Korea for crude oil exports), although without providing any concrete details.
Conversely, recent geopolitical events have had a positive impact.
Conversely, recent geopolitical events have had a positive impact. In October 2020, the UN arms embargo against Iran was lifted, as envisaged in the JCPOA. Although this is unlikely to transform and modernize Iran’s military arsenal, it was celebrated by Iran as a political victory against the U.S. campaign of “maximum pressure,” improving expectations in Iran’s market. Almost immediately, the rial appreciated against the USD by about 10 percent (see the rightmost vertical line in Fig. 1). Moreover, the defeat of Donald Trump in the recent U.S. presidential election had an additional positive impact on Iran’s market: the rial briefly appreciated by another 10 percent. Those holding foreign currency as an investment supplied it immediately to the market in order to avoid further losses. Also, exporters injected more foreign revenues into the market. However, this situation remains unstable as Iran still faces a trade deficit as long as U.S. sanctions persist.
HARMFUL DOMESTIC POLICIES
The consequence would be called stagflation, in which both high inflation and recession take place at the same time.
Inflationary pressure, a result of bad domestic policies, exacerbates the country’s economic downturn. Since the price of imported goods soared due to the depreciation of the rial, the government cannot finance its fiscal stimulus package, as oil revenues are blocked by U.S sanctions. To support its expenditure, the administration issued bonds through open market operations. These bonds may be added to previous government debt claimed by public institutions like the Social Security Organization. However, the rest of the government budget and the introduced fiscal stimulus to counter the pandemic should be financed by increasing the money supply. Because GDP is declining and the money circulating in the economy is increasing, the increased money supply directly results in higher prices. Consequently, in an economy with increasing inflation, and with a nominal interest rate smaller than the inflation, savings will not be invested in banks while capital flies away to unproductive and speculative investments in the foreign-currency market and the Tehran Stock Exchange. This is a situation in which government bonds are not profitable for banks and individuals, and the fiscal space of the government becomes more restricted. The consequence would be called stagflation, in which both high inflation and recession take place at the same time.
A PATH FORWARD
Iran’s “resistance economy” may no longer work, which help explains why the regime is more heavily relying on repression to avert the next uprising.
Currently, Iran struggles to find an appropriate economic policy to solve its problems as it remains under sanctions and lacks access to foreign reserves and international financing. The priority in the short run is to stimulate economic growth, using the fiscal space as the administration did with direct cash handouts and subsidies to some vulnerable sectors. Ultimately, the stimulus amounted to about 6 percent of Iran’s GDP.
However, the government faces revenue shortages and finances its budget through open market operations, as it has had no international creditor to finance infrastructure investment projects. Issuing money to finance government budgets led to high inflation, macroeconomic instabilities, and exchange-rate depreciation. If the administration continues to implement its fiscal policies through the Central Bank, the so-called “helicopter money” may further destabilize the economy. In other words, Iran’s “resistance economy” may no longer work, which help explains why the regime is more heavily relying on repression to avert the next uprising.
As much as Iran’s current economic woes have been a consequence of the U.S. withdrawal from the JCPOA and the re-imposition of secondary sanctions, the prospect of a new U.S. administration offers Tehran some breathing room as President-elect Biden may return to the JCPOA if Iran steps back to its strict compliance with the deal. But until Biden enters the White House in January, the Islamic Republic will have to resist Washington’s “maximum pressure” campaign with its “resilience economy,” is very much directed by its military apparatus businesses. A major share of economic activity in Iran is run by very large semi-public companies, the so-called Foundations (Bonyads) and Executive Headquarters (Setads) whose leadership is appointed by the Supreme Leader from the ranks of former commanders of the Islamic Revolutionary Guards Corps (IRGC). These companies are usually exempt from taxes on turnover or value added and they have several holding companies active on the Tehran Stock Exchange. It is expected that these companies will steer the “resistance economy” through the ongoing crisis, which may further corruption at the highest levels of power.
At the same time, Tehran has been boosting its domestic security, as it fears the next, potentially more intense, wave of street protests. The pandemic has acted as a catalyst here, as the poor and unemployed have seen their conditions deteriorate further, effectively stirring the feeling that they have nothing else to lose. Protestors in the last two nationwide upheavals in Iran hailed mostly from poorer segments of society, and this has become a top security threat for the Islamic Republic.
The best solution—for Iran—rests in ending the four-decade animosity with the United States.
Iran’s economic crisis remains heavily connected to its enmity with the United States. Only if the incoming Biden administration recommits Washington to the JCPOA and lessens sanctions might there be a way out of the country’s economic woes. Also, given the complexity of easing a highly comprehensive sanctions regime and uncertainties over the future of U.S. Iran policy, the best solution—for Iran—rests in ending the four-decade animosity with the United States, though admittedly this is an unlikely scenario. Yet, this is the only way for Iran to meaningfully diversify its economy, unlock its huge potential, and nurture large reserves of human capital, which will help it to enter the path of sustainable development.
The enormous depreciation of the rial against other currencies over the past decade illuminates the deterioration of Iran’s terms of trade versus the rest of the world. A country’s exchange rate is an indicator of its economy’s performance and terms of trade with the global economy. Therefore, with better terms of trade, a country can export more sophisticated products and reach the path of sustainable development, experienced in many (re-)emerging and industrial economies.1 Iran’s trade balance should improve as a result of the nominal depreciation of a currency, making exported goods cheaper and leading to a rise in total exports. However, due to the rial’s depreciation, Iran’s imported goods become more expensive, leading to a decrease in imports. Yet, Iran depends on importing many sophisticated products such as pharmaceuticals, medical devices, and machineries—and a currency depreciation mostly results in more expensive supply of these products.
In addition, a high volatility of a country’s exchange rate usually causes instability in terms of trade. Iran’s exchange rate has been depreciating with a strong volatility during the past three years (see Fig. 1 below). This has caused a so-called asymmetric adjustment shock on the trade balance due to the rial’s persistent depreciations, and shortages and high prices in the supply of goods to Iran’s market.2
Iran’s national currency is one of the main indicators of Iran’s economic health, and since January 2018, the rial depreciated enormously against the U.S. dollar by 450 percent, from 42,880 rials to one U.S. dollar to 318,560 rials on October 18, 2020. While this is the market rate, major imports are financed by the official rate, which is fixed at 42,000 rials per USD from March 2019. The first major depreciation of the rial began in the months leading to the U.S. withdrawal from the JCPOA in May 2018 (see the orange vertical line in Fig. 1). In September 2018, the Central Bank of Iran (CBI) implemented measures to allocate currency for major imports through export revenues, using the official exchange rate (the blue vertical line in Fig. 1). This hindered the depreciation of the rial in the second (unofficial) market only for a short period, and the depreciation path again continued until Tehran lifted limits on its uranium enrichment on May 8, 2019 (the brown vertical line in Fig. 1). Then, the rial was slightly appreciating until November 13, 2019. On November 14, 2019, the Iranian administration cut the gasoline subsidy, which triggered massive nationwide unrest followed by a brutal crackdown. Since then, the rial has continued to lose value.
The U.S. “maximum pressure” campaign has decimated Iran’s oil exports, falling from 2.6 million barrels per day (bpd) in May 2018, to between 600,000 and 700,000 bpd for much of the current year.3 Despite the recent increase in hydrocarbon exports, Iran’s hard-currency revenues remain extremely strained, as problems in repatriating these funds persist. Iran has increasingly exported products and manufacturing to neighboring countries to finance its own imports. However, due to the coronavirus pandemic and border closures with neighboring countries, even these exports have been limited. As a result, Iran’s currency reserves are shrinking due to the reduction in exports, resulting in a substantial trade deficit. The CBI and the administration, which control these reserves, tried hard to keep the trade surplus for decades. Iran had enjoyed a current-account surplus until 2012, when international and UN sanctions paralyzed its international trade. The surplus had accumulated in currency reserves, but access to these reserves was impeded by international sanctions in 2012 and since 2018 by U.S. secondary sanctions. However, Iran relies heavily on imports, from primary livestock feed and food, to technologically highly advanced products like raw and bulk medicine, electrical appliances, ICT equipment, machineries and capital goods, and pharmaceutical equipment. Therefore, with the shortcomings of hard/foreign currency in Iran’s market, there is a direct push on demand for foreign currency to import needed products.
RISING GEOPOLITICAL TENSIONS
The second reason behind Iran’s troubled economic conditions is increasing geopolitical tensions. In addition to the hard-currency shortfall due to lack of export revenues, the International Atomic Energy Agency (IAEA) Board of Governors’ resolution against Tehran’s NPT (Non-Proliferation Treaty) Safeguards Agreement is another factor behind the depreciation of the rial. The first critical resolution against Iran since 2012, it lamented the “denial of access to two locations specified by the IAEA under the Additional Protocol and continued lack of clarification regarding Agency questions related to possible undeclared nuclear material and nuclear related activities in Iran.” Following the passing of the resolution, the rial encountered another sharp depreciation against the USD. The IAEA resolution prompted a capital flight through dollarization in the second market. This recalls a similar pattern following a previous IAEA resolution in October 2012. In May 2012, the market exchange rate was about 15,750 rials per USD—after the October 2012 resolution, the rate doubled to around 33,000 rials per USD. This was one of the sharpest depreciations of the Iranian currency over recent decades.
The Iranian rial hit another negative record in its value against the USD in September 2020, selling for 273,000 rials on the unofficial market, the day after President Trump announced that all UN sanctions on Iran were re-imposed. Again on October 1, Iran’s currency reached yet another new record low, standing at 300,000 rials against the U.S. dollar. Confirming the connection between the rial’s devaluation and geopolitical events, Abdolnaser Hemmati, governor of the CBI, said that the Trump administration’s September 29 announcement to “completely cut off Iran’s financial system” with a fresh set of sanctions had a “psychological effect” on the country’s foreign-exchange market. However, Hemmati also expressed optimism for the repatriation of some of Iran’s frozen assets (notably $3 billion from Iraq for electricity and gas exports as well as $7 billion from South Korea for crude oil exports), although without providing any concrete details.
Conversely, recent geopolitical events have had a positive impact.
The COVID-19 pandemic has deteriorated Iran’s already ailing economy, yet the country’s economic crisis is rooted in factors beyond the pandemic’s fallout. Since the United States’ 2018 withdrawal from the Join Comprehensive Plan of Action (JCPOA), it has become clear that Iran’s economic woes—especially its currency devaluation—are strongly correlated with key political and geopolitical events. The volatility in the exchange rate and Iran’s currency depreciation are signs of an unhealthy economy.
The enormous depreciation of the rial against other currencies over the past decade illuminates the deterioration of Iran’s terms of trade versus the rest of the world. A country’s exchange rate is an indicator of its economy’s performance and terms of trade with the global economy. Therefore, with better terms of trade, a country can export more sophisticated products and reach the path of sustainable development, experienced in many (re-)emerging and industrial economies.1 Iran’s trade balance should improve as a result of the nominal depreciation of a currency, making exported goods cheaper and leading to a rise in total exports. However, due to the rial’s depreciation, Iran’s imported goods become more expensive, leading to a decrease in imports. Yet, Iran depends on importing many sophisticated products such as pharmaceuticals, medical devices, and machineries—and a currency depreciation mostly results in more expensive supply of these products.
In addition, a high volatility of a country’s exchange rate usually causes instability in terms of trade. Iran’s exchange rate has been depreciating with a strong volatility during the past three years (see Fig. 1 below). This has caused a so-called asymmetric adjustment shock on the trade balance due to the rial’s persistent depreciations, and shortages and high prices in the supply of goods to Iran’s market.2
Iran’s national currency is one of the main indicators of Iran’s economic health, and since January 2018, the rial depreciated enormously against the U.S. dollar by 450 percent, from 42,880 rials to one U.S. dollar to 318,560 rials on October 18, 2020. While this is the market rate, major imports are financed by the official rate, which is fixed at 42,000 rials per USD from March 2019. The first major depreciation of the rial began in the months leading to the U.S. withdrawal from the JCPOA in May 2018 (see the orange vertical line in Fig. 1). In September 2018, the Central Bank of Iran (CBI) implemented measures to allocate currency for major imports through export revenues, using the official exchange rate (the blue vertical line in Fig. 1). This hindered the depreciation of the rial in the second (unofficial) market only for a short period, and the depreciation path again continued until Tehran lifted limits on its uranium enrichment on May 8, 2019 (the brown vertical line in Fig. 1). Then, the rial was slightly appreciating until November 13, 2019. On November 14, 2019, the Iranian administration cut the gasoline subsidy, which triggered massive nationwide unrest followed by a brutal crackdown. Since then, the rial has continued to lose value.
Figure 1 – Development of the nominal exchange rate between the U.S. dollar and Iranian rial
Iran’s economic crisis remains heavily connected to its enmity with the United States. The best tool for economic diversification and sustainable development is an end to the four decades of animosity between Tehran and Washington.
Source: TGJU – Financial Markets Network
THE “MAXIMUM PRESSURE” CAMPAIGN
However, this depreciation of the rial against the USD is neither unprecedented nor unexpected. Iran has lost a great deal in export revenues due to the secondary U.S. sanctions re-imposed almost two years ago in May 2018. These secondary sanctions penalize firms from third countries that engage in business and trade with Iran. Thus, sanctions do not allow Iran to export easily. According to the World Bank, Iran’s economy is forecast to contract by 5.3 percent in its third year of recession, mostly due to the COVID-19 pandemic. Therefore, by the end of 2020, the size of Iran’s economy will be less than 83 percent of its 2017 level prior to the U.S. withdrawal from the JCPOA.
The U.S. “maximum pressure” campaign has decimated Iran’s oil exports, falling from 2.6 million barrels per day (bpd) in May 2018, to between 600,000 and 700,000 bpd for much of the current year.3 Despite the recent increase in hydrocarbon exports, Iran’s hard-currency revenues remain extremely strained, as problems in repatriating these funds persist. Iran has increasingly exported products and manufacturing to neighboring countries to finance its own imports. However, due to the coronavirus pandemic and border closures with neighboring countries, even these exports have been limited. As a result, Iran’s currency reserves are shrinking due to the reduction in exports, resulting in a substantial trade deficit. The CBI and the administration, which control these reserves, tried hard to keep the trade surplus for decades. Iran had enjoyed a current-account surplus until 2012, when international and UN sanctions paralyzed its international trade. The surplus had accumulated in currency reserves, but access to these reserves was impeded by international sanctions in 2012 and since 2018 by U.S. secondary sanctions. However, Iran relies heavily on imports, from primary livestock feed and food, to technologically highly advanced products like raw and bulk medicine, electrical appliances, ICT equipment, machineries and capital goods, and pharmaceutical equipment. Therefore, with the shortcomings of hard/foreign currency in Iran’s market, there is a direct push on demand for foreign currency to import needed products.
RISING GEOPOLITICAL TENSIONS
The second reason behind Iran’s troubled economic conditions is increasing geopolitical tensions. In addition to the hard-currency shortfall due to lack of export revenues, the International Atomic Energy Agency (IAEA) Board of Governors’ resolution against Tehran’s NPT (Non-Proliferation Treaty) Safeguards Agreement is another factor behind the depreciation of the rial. The first critical resolution against Iran since 2012, it lamented the “denial of access to two locations specified by the IAEA under the Additional Protocol and continued lack of clarification regarding Agency questions related to possible undeclared nuclear material and nuclear related activities in Iran.” Following the passing of the resolution, the rial encountered another sharp depreciation against the USD. The IAEA resolution prompted a capital flight through dollarization in the second market. This recalls a similar pattern following a previous IAEA resolution in October 2012. In May 2012, the market exchange rate was about 15,750 rials per USD—after the October 2012 resolution, the rate doubled to around 33,000 rials per USD. This was one of the sharpest depreciations of the Iranian currency over recent decades.
The Iranian rial hit another negative record in its value against the USD in September 2020, selling for 273,000 rials on the unofficial market, the day after President Trump announced that all UN sanctions on Iran were re-imposed. Again on October 1, Iran’s currency reached yet another new record low, standing at 300,000 rials against the U.S. dollar. Confirming the connection between the rial’s devaluation and geopolitical events, Abdolnaser Hemmati, governor of the CBI, said that the Trump administration’s September 29 announcement to “completely cut off Iran’s financial system” with a fresh set of sanctions had a “psychological effect” on the country’s foreign-exchange market. However, Hemmati also expressed optimism for the repatriation of some of Iran’s frozen assets (notably $3 billion from Iraq for electricity and gas exports as well as $7 billion from South Korea for crude oil exports), although without providing any concrete details.
Conversely, recent geopolitical events have had a positive impact.
Conversely, recent geopolitical events have had a positive impact. In October 2020, the UN arms embargo against Iran was lifted, as envisaged in the JCPOA. Although this is unlikely to transform and modernize Iran’s military arsenal, it was celebrated by Iran as a political victory against the U.S. campaign of “maximum pressure,” improving expectations in Iran’s market. Almost immediately, the rial appreciated against the USD by about 10 percent (see the rightmost vertical line in Fig. 1). Moreover, the defeat of Donald Trump in the recent U.S. presidential election had an additional positive impact on Iran’s market: the rial briefly appreciated by another 10 percent. Those holding foreign currency as an investment supplied it immediately to the market in order to avoid further losses. Also, exporters injected more foreign revenues into the market. However, this situation remains unstable as Iran still faces a trade deficit as long as U.S. sanctions persist.
HARMFUL DOMESTIC POLICIES
The consequence would be called stagflation, in which both high inflation and recession take place at the same time.
Inflationary pressure, a result of bad domestic policies, exacerbates the country’s economic downturn. Since the price of imported goods soared due to the depreciation of the rial, the government cannot finance its fiscal stimulus package, as oil revenues are blocked by U.S sanctions. To support its expenditure, the administration issued bonds through open market operations. These bonds may be added to previous government debt claimed by public institutions like the Social Security Organization. However, the rest of the government budget and the introduced fiscal stimulus to counter the pandemic should be financed by increasing the money supply. Because GDP is declining and the money circulating in the economy is increasing, the increased money supply directly results in higher prices. Consequently, in an economy with increasing inflation, and with a nominal interest rate smaller than the inflation, savings will not be invested in banks while capital flies away to unproductive and speculative investments in the foreign-currency market and the Tehran Stock Exchange. This is a situation in which government bonds are not profitable for banks and individuals, and the fiscal space of the government becomes more restricted. The consequence would be called stagflation, in which both high inflation and recession take place at the same time.
A PATH FORWARD
Iran’s “resistance economy” may no longer work, which help explains why the regime is more heavily relying on repression to avert the next uprising.
Currently, Iran struggles to find an appropriate economic policy to solve its problems as it remains under sanctions and lacks access to foreign reserves and international financing. The priority in the short run is to stimulate economic growth, using the fiscal space as the administration did with direct cash handouts and subsidies to some vulnerable sectors. Ultimately, the stimulus amounted to about 6 percent of Iran’s GDP.
However, the government faces revenue shortages and finances its budget through open market operations, as it has had no international creditor to finance infrastructure investment projects. Issuing money to finance government budgets led to high inflation, macroeconomic instabilities, and exchange-rate depreciation. If the administration continues to implement its fiscal policies through the Central Bank, the so-called “helicopter money” may further destabilize the economy. In other words, Iran’s “resistance economy” may no longer work, which help explains why the regime is more heavily relying on repression to avert the next uprising.
As much as Iran’s current economic woes have been a consequence of the U.S. withdrawal from the JCPOA and the re-imposition of secondary sanctions, the prospect of a new U.S. administration offers Tehran some breathing room as President-elect Biden may return to the JCPOA if Iran steps back to its strict compliance with the deal. But until Biden enters the White House in January, the Islamic Republic will have to resist Washington’s “maximum pressure” campaign with its “resilience economy,” is very much directed by its military apparatus businesses. A major share of economic activity in Iran is run by very large semi-public companies, the so-called Foundations (Bonyads) and Executive Headquarters (Setads) whose leadership is appointed by the Supreme Leader from the ranks of former commanders of the Islamic Revolutionary Guards Corps (IRGC). These companies are usually exempt from taxes on turnover or value added and they have several holding companies active on the Tehran Stock Exchange. It is expected that these companies will steer the “resistance economy” through the ongoing crisis, which may further corruption at the highest levels of power.
At the same time, Tehran has been boosting its domestic security, as it fears the next, potentially more intense, wave of street protests. The pandemic has acted as a catalyst here, as the poor and unemployed have seen their conditions deteriorate further, effectively stirring the feeling that they have nothing else to lose. Protestors in the last two nationwide upheavals in Iran hailed mostly from poorer segments of society, and this has become a top security threat for the Islamic Republic.
The best solution—for Iran—rests in ending the four-decade animosity with the United States.
Iran’s economic crisis remains heavily connected to its enmity with the United States. Only if the incoming Biden administration recommits Washington to the JCPOA and lessens sanctions might there be a way out of the country’s economic woes. Also, given the complexity of easing a highly comprehensive sanctions regime and uncertainties over the future of U.S. Iran policy, the best solution—for Iran—rests in ending the four-decade animosity with the United States, though admittedly this is an unlikely scenario. Yet, this is the only way for Iran to meaningfully diversify its economy, unlock its huge potential, and nurture large reserves of human capital, which will help it to enter the path of sustainable development.
Comment:
Iran Gasoline Prices at 0.36 USD/Liter
Iran - Credit Rating at 15.00
Iran Steel Production at 3300.00 Thousand Tonnes
Iran Crude Oil Production at 2679.00 BBL/D/1K
Iran Crude Oil Rigs at 117.00
Iran Military Expenditure at 6846.60 USD Million
Iran Youth Unemployment Rate at 26.90 percent
Iran Food Inflation at 78.50 percent
Iran Consumer Price Index (CPI) at 514.20 points
Iran Inflation Rate at 54.60 percent
Japanese Yen Iranian Toman traded at 291.042 this Friday June 30th, increasing 0.754 or 0.26 percent since the previous trading session. Looking back, over the last four weeks, JPYIRR gained 3.13 percent. Over the last 12 months, its price fell by 5.94 percent. Looking ahead, we forecast Japanese Yen Iranian Toman to be priced at 287.862 by the end of this quarter and at 274.838 in one year, according to Trading Economics global macro models projections and analysts expectations.
Iran - Credit Rating at 15.00
Iran Steel Production at 3300.00 Thousand Tonnes
Iran Crude Oil Production at 2679.00 BBL/D/1K
Iran Crude Oil Rigs at 117.00
Iran Military Expenditure at 6846.60 USD Million
Iran Youth Unemployment Rate at 26.90 percent
Iran Food Inflation at 78.50 percent
Iran Consumer Price Index (CPI) at 514.20 points
Iran Inflation Rate at 54.60 percent
Japanese Yen Iranian Toman traded at 291.042 this Friday June 30th, increasing 0.754 or 0.26 percent since the previous trading session. Looking back, over the last four weeks, JPYIRR gained 3.13 percent. Over the last 12 months, its price fell by 5.94 percent. Looking ahead, we forecast Japanese Yen Iranian Toman to be priced at 287.862 by the end of this quarter and at 274.838 in one year, according to Trading Economics global macro models projections and analysts expectations.
Comment:
A weak Iranian rial (IRR) can have both positive and negative implications for Iran's economy. Here are some reasons why a weak rial can be beneficial for Iran:
Export Competitiveness: A weak rial makes Iranian goods and services more affordable and competitive in international markets. When the rial depreciates, it lowers the price of Iranian exports in foreign currencies. This can stimulate export growth and support industries such as oil, petrochemicals, agriculture, and manufacturing. Increased exports can generate foreign exchange earnings, boost economic activity, and contribute to employment and income generation in Iran.
Tourism and Services: A weak rial can make Iran an attractive destination for foreign tourists as travel expenses become relatively cheaper. This can stimulate the tourism industry and generate revenue through spending on accommodations, transportation, dining, and sightseeing. Furthermore, a weak rial can make Iranian services, such as medical tourism and educational services, more affordable and appealing to international clients.
Remittances: Iran has a significant number of citizens living and working abroad who send remittances back to their families. A weak rial increases the value of these remittances when converted into the local currency. This can provide support to household incomes, consumption, and overall economic stability.
However, a weak Iranian rial can also have negative consequences for Iran:
Inflationary Pressures: A weak rial can contribute to inflationary pressures by increasing the cost of imported goods, including essential commodities, raw materials, and consumer products. This can erode purchasing power, reduce living standards, and affect the affordability of imported goods for businesses and consumers.
Import Dependency: Iran relies on imports for various goods, including machinery, technology, and food items. A weak rial raises the cost of importing these goods, which can negatively impact businesses, industries, and consumers dependent on imported products. It can also strain the country's trade balance and foreign exchange reserves.
Economic Stability: A weak rial can create uncertainty and volatility in the financial markets, which can hamper investment, economic planning, and overall stability. It may also lead to capital flight, as individuals and businesses seek to protect their wealth by converting rials into more stable currencies.
It's important to consider that the impact of a weak rial is not uniform across all sectors and segments of the population. Different industries, businesses, and individuals may experience varying effects depending on their exposure to international trade, import/export dynamics, and overall economic conditions. Additionally, government policies and interventions can influence how the weakness or strength of the rial is managed and its impact on the economy.
Export Competitiveness: A weak rial makes Iranian goods and services more affordable and competitive in international markets. When the rial depreciates, it lowers the price of Iranian exports in foreign currencies. This can stimulate export growth and support industries such as oil, petrochemicals, agriculture, and manufacturing. Increased exports can generate foreign exchange earnings, boost economic activity, and contribute to employment and income generation in Iran.
Tourism and Services: A weak rial can make Iran an attractive destination for foreign tourists as travel expenses become relatively cheaper. This can stimulate the tourism industry and generate revenue through spending on accommodations, transportation, dining, and sightseeing. Furthermore, a weak rial can make Iranian services, such as medical tourism and educational services, more affordable and appealing to international clients.
Remittances: Iran has a significant number of citizens living and working abroad who send remittances back to their families. A weak rial increases the value of these remittances when converted into the local currency. This can provide support to household incomes, consumption, and overall economic stability.
However, a weak Iranian rial can also have negative consequences for Iran:
Inflationary Pressures: A weak rial can contribute to inflationary pressures by increasing the cost of imported goods, including essential commodities, raw materials, and consumer products. This can erode purchasing power, reduce living standards, and affect the affordability of imported goods for businesses and consumers.
Import Dependency: Iran relies on imports for various goods, including machinery, technology, and food items. A weak rial raises the cost of importing these goods, which can negatively impact businesses, industries, and consumers dependent on imported products. It can also strain the country's trade balance and foreign exchange reserves.
Economic Stability: A weak rial can create uncertainty and volatility in the financial markets, which can hamper investment, economic planning, and overall stability. It may also lead to capital flight, as individuals and businesses seek to protect their wealth by converting rials into more stable currencies.
It's important to consider that the impact of a weak rial is not uniform across all sectors and segments of the population. Different industries, businesses, and individuals may experience varying effects depending on their exposure to international trade, import/export dynamics, and overall economic conditions. Additionally, government policies and interventions can influence how the weakness or strength of the rial is managed and its impact on the economy.
Comment:
Here are a few more factors to consider regarding the impact of a weak Iranian rial on Iran's economy:
Government Finances: Iran is an oil-exporting country, and a weak rial can benefit the government's finances in terms of oil revenue. As oil is priced in US dollars, a weaker rial means the government receives more rials for each dollar of oil sold. This can help boost government revenues, support budgetary needs, and potentially alleviate fiscal pressures.
Investment and Capital Inflows: A weak rial may make Iran an attractive destination for foreign direct investment (FDI) and foreign capital inflows. Foreign investors can take advantage of lower asset prices, such as real estate, stocks, or businesses, making investments relatively cheaper. This can stimulate investment activity, job creation, and economic growth in Iran.
Domestic Manufacturing and Industries: A weak rial can encourage domestic production and industrial activities by making imported inputs and raw materials relatively more expensive. This can incentivize local businesses to rely on domestically sourced materials and reduce their dependence on imports. It can also create opportunities for import substitution industries to develop, which can lead to self-sufficiency and enhance the resilience of Iran's economy.
On the other hand, here are a few reasons why a weak Iranian rial can be detrimental to Iran's economy:
Imported Inflation: As mentioned earlier, a weak rial can increase the cost of imported goods, including essential commodities and consumer products. This can lead to higher inflation rates, which erode the purchasing power of households and reduce their standard of living. It can be particularly burdensome for low-income individuals who spend a larger proportion of their income on basic necessities.
Dependence on Imports: Iran relies on imports for various goods, including advanced technology, machinery, and specialized equipment. A weak rial can increase the cost of importing these items, making it more challenging for businesses to access the necessary tools and technologies to remain competitive. It can hinder technological advancements, productivity growth, and overall economic development.
Balance of Payments and External Debt: A weak rial can put pressure on Iran's balance of payments, especially if the country's export earnings are insufficient to cover its import expenses. This can lead to a widening trade deficit and increased reliance on external borrowing to finance the deficit. If not managed effectively, a growing external debt burden can create financial vulnerabilities and limit the country's economic options in the long run.
It's worth noting that the impact of a weak rial on Iran's economy is influenced by various interconnected factors, including government policies, global market conditions, international sanctions, and geopolitical dynamics. Additionally, the effectiveness of exchange rate policies and economic management plays a crucial role in determining how the advantages and disadvantages of a weak rial manifest in the overall economy.
Government Finances: Iran is an oil-exporting country, and a weak rial can benefit the government's finances in terms of oil revenue. As oil is priced in US dollars, a weaker rial means the government receives more rials for each dollar of oil sold. This can help boost government revenues, support budgetary needs, and potentially alleviate fiscal pressures.
Investment and Capital Inflows: A weak rial may make Iran an attractive destination for foreign direct investment (FDI) and foreign capital inflows. Foreign investors can take advantage of lower asset prices, such as real estate, stocks, or businesses, making investments relatively cheaper. This can stimulate investment activity, job creation, and economic growth in Iran.
Domestic Manufacturing and Industries: A weak rial can encourage domestic production and industrial activities by making imported inputs and raw materials relatively more expensive. This can incentivize local businesses to rely on domestically sourced materials and reduce their dependence on imports. It can also create opportunities for import substitution industries to develop, which can lead to self-sufficiency and enhance the resilience of Iran's economy.
On the other hand, here are a few reasons why a weak Iranian rial can be detrimental to Iran's economy:
Imported Inflation: As mentioned earlier, a weak rial can increase the cost of imported goods, including essential commodities and consumer products. This can lead to higher inflation rates, which erode the purchasing power of households and reduce their standard of living. It can be particularly burdensome for low-income individuals who spend a larger proportion of their income on basic necessities.
Dependence on Imports: Iran relies on imports for various goods, including advanced technology, machinery, and specialized equipment. A weak rial can increase the cost of importing these items, making it more challenging for businesses to access the necessary tools and technologies to remain competitive. It can hinder technological advancements, productivity growth, and overall economic development.
Balance of Payments and External Debt: A weak rial can put pressure on Iran's balance of payments, especially if the country's export earnings are insufficient to cover its import expenses. This can lead to a widening trade deficit and increased reliance on external borrowing to finance the deficit. If not managed effectively, a growing external debt burden can create financial vulnerabilities and limit the country's economic options in the long run.
It's worth noting that the impact of a weak rial on Iran's economy is influenced by various interconnected factors, including government policies, global market conditions, international sanctions, and geopolitical dynamics. Additionally, the effectiveness of exchange rate policies and economic management plays a crucial role in determining how the advantages and disadvantages of a weak rial manifest in the overall economy.
Comment:
Here are a few more points to consider regarding the impact of a weak Iranian rial on Iran's economy:
Trade Competitiveness: A weak rial can make Iranian exports more competitive in international markets. As the value of the currency decreases, Iranian goods become relatively cheaper for foreign buyers, potentially boosting export volumes. This can help increase export revenues, support domestic industries, and contribute to economic growth.
Tourism and Services Sector: A weak rial can make Iran an attractive destination for foreign tourists and travelers. As the cost of travel and services becomes relatively cheaper, it can encourage an influx of visitors, leading to increased tourism revenues. This can benefit sectors such as hospitality, transportation, restaurants, and other service-oriented industries, providing employment opportunities and economic stimulus.
Remittances: Iran has a significant diaspora living abroad, particularly in countries such as the United States, Canada, and European nations. A weak rial can make it more favorable for Iranians living abroad to send remittances back to their home country. Increased remittance inflows can provide a source of foreign currency and contribute to household incomes and consumption.
On the other hand, here are a few reasons why a weak Iranian rial can be detrimental to Iran's economy:
Import Dependency: Iran relies on imports for various essential goods, including food, medicine, and energy products. A weak rial can increase the cost of importing these items, leading to higher prices for consumers and potential shortages if the country faces difficulties in accessing foreign currency. This can impact the population's well-being and social stability.
Capital Flight: A weak rial can erode confidence in the domestic currency and prompt individuals and businesses to move their assets out of Iran to preserve their value. Capital flight can result in a loss of investment, reduced domestic economic activity, and a further weakening of the currency, creating a negative cycle for the economy.
Financial Stability: A weak rial can pose challenges to the stability of Iran's financial system. It can increase the risk of inflationary pressures, reduce the value of savings and deposits held in rials, and lead to currency volatility. This can undermine investor confidence, limit access to credit, and hinder long-term economic growth.
Trade Competitiveness: A weak rial can make Iranian exports more competitive in international markets. As the value of the currency decreases, Iranian goods become relatively cheaper for foreign buyers, potentially boosting export volumes. This can help increase export revenues, support domestic industries, and contribute to economic growth.
Tourism and Services Sector: A weak rial can make Iran an attractive destination for foreign tourists and travelers. As the cost of travel and services becomes relatively cheaper, it can encourage an influx of visitors, leading to increased tourism revenues. This can benefit sectors such as hospitality, transportation, restaurants, and other service-oriented industries, providing employment opportunities and economic stimulus.
Remittances: Iran has a significant diaspora living abroad, particularly in countries such as the United States, Canada, and European nations. A weak rial can make it more favorable for Iranians living abroad to send remittances back to their home country. Increased remittance inflows can provide a source of foreign currency and contribute to household incomes and consumption.
On the other hand, here are a few reasons why a weak Iranian rial can be detrimental to Iran's economy:
Import Dependency: Iran relies on imports for various essential goods, including food, medicine, and energy products. A weak rial can increase the cost of importing these items, leading to higher prices for consumers and potential shortages if the country faces difficulties in accessing foreign currency. This can impact the population's well-being and social stability.
Capital Flight: A weak rial can erode confidence in the domestic currency and prompt individuals and businesses to move their assets out of Iran to preserve their value. Capital flight can result in a loss of investment, reduced domestic economic activity, and a further weakening of the currency, creating a negative cycle for the economy.
Financial Stability: A weak rial can pose challenges to the stability of Iran's financial system. It can increase the risk of inflationary pressures, reduce the value of savings and deposits held in rials, and lead to currency volatility. This can undermine investor confidence, limit access to credit, and hinder long-term economic growth.
Comment:
Inflationary Pressures: A weak rial can contribute to inflationary pressures within the Iranian economy. When the value of the currency declines, it can lead to higher prices for imported goods, raw materials, and intermediate inputs. This, in turn, can push up overall price levels, reducing purchasing power for consumers and potentially eroding living standards.
Dependency on Imports: Iran's domestic production capacity may not be sufficient to meet all its needs, particularly for technologically advanced goods and certain consumer products. A weak rial makes imports more expensive, which can further deepen the country's dependency on foreign goods and services. This can have long-term implications for Iran's industrial and technological development.
Economic Uncertainty and Investment: A weak currency can create economic uncertainty, making it challenging for businesses to plan and invest in the future. Fluctuating exchange rates and the risk of further depreciation may deter both domestic and foreign investment, as investors seek more stable environments to protect their capital. This can impede economic growth and hinder the development of key industries.
Socioeconomic Inequality: A weak rial can exacerbate socioeconomic inequality within Iran. As prices rise due to inflationary pressures, vulnerable populations with limited purchasing power may find it increasingly difficult to afford basic necessities. This can deepen income disparities and contribute to social unrest and political instability.
Confidence and Reputation: A weak currency can affect Iran's reputation in international markets and erode confidence in its economic policies. It may lead to perceptions of economic instability and increase the risk associated with engaging in business transactions with Iranian entities. This can negatively impact foreign direct investment, trade relationships, and overall economic cooperation with other countries.
It's important to note that the impact of a weak currency on an economy is not always straightforward, and there can be both positive and negative consequences depending on various factors. Economic policies, structural reforms, and the ability to effectively manage and stabilize the currency can play significant roles in mitigating the adverse effects and harnessing potential benefits.
Dependency on Imports: Iran's domestic production capacity may not be sufficient to meet all its needs, particularly for technologically advanced goods and certain consumer products. A weak rial makes imports more expensive, which can further deepen the country's dependency on foreign goods and services. This can have long-term implications for Iran's industrial and technological development.
Economic Uncertainty and Investment: A weak currency can create economic uncertainty, making it challenging for businesses to plan and invest in the future. Fluctuating exchange rates and the risk of further depreciation may deter both domestic and foreign investment, as investors seek more stable environments to protect their capital. This can impede economic growth and hinder the development of key industries.
Socioeconomic Inequality: A weak rial can exacerbate socioeconomic inequality within Iran. As prices rise due to inflationary pressures, vulnerable populations with limited purchasing power may find it increasingly difficult to afford basic necessities. This can deepen income disparities and contribute to social unrest and political instability.
Confidence and Reputation: A weak currency can affect Iran's reputation in international markets and erode confidence in its economic policies. It may lead to perceptions of economic instability and increase the risk associated with engaging in business transactions with Iranian entities. This can negatively impact foreign direct investment, trade relationships, and overall economic cooperation with other countries.
It's important to note that the impact of a weak currency on an economy is not always straightforward, and there can be both positive and negative consequences depending on various factors. Economic policies, structural reforms, and the ability to effectively manage and stabilize the currency can play significant roles in mitigating the adverse effects and harnessing potential benefits.
Comment:
Here are some potential impacts of a weak Iranian rial on various neighboring countries, oil exporting countries, oil importing countries, European and Western countries, Asia countries, and countries that impose sanctions on Iran. Additionally, I'll also discuss the potential impacts of a strong or stronger Iranian rial:
Impacts of Weak Iranian Rial:
1. Neighboring Countries: A weak Iranian rial can have mixed effects on neighboring countries. It may lead to increased cross-border trade as Iranian goods become relatively cheaper for neighboring countries. However, it can also lead to economic challenges for countries heavily reliant on trade with Iran, as Iran may have reduced purchasing power for their exports.
2. Oil Exporting Countries: For oil-exporting countries, a weak Iranian rial can potentially increase their competitiveness in the global oil market. If Iran's oil exports become relatively cheaper due to the weak currency, it may put pressure on other oil-exporting countries to adjust their prices or compete more aggressively.
3. Oil Importing Countries: Oil-importing countries may benefit from a weak Iranian rial as it can lower their import costs of Iranian oil. This can positively impact their trade balance and reduce their energy expenses. However, this assumes that Iran continues to export oil despite potential economic challenges caused by the weak currency.
4. European and Western Countries: A weak Iranian rial can affect European and Western countries in several ways. It may increase the cost of imports from Iran, potentially leading to higher prices for Iranian goods in those markets. Additionally, it can impact trade volumes and economic cooperation with Iran, depending on the specific sanctions and restrictions in place.
5. Asian Countries: The impact of a weak Iranian rial on Asian countries can vary depending on their trade relationships with Iran. Asian countries that import goods from Iran may benefit from lower import costs, while those exporting to Iran may face challenges due to reduced purchasing power and demand.
6. Countries Sanctioning Iran: Countries that impose sanctions on Iran may see limited direct impact from a weak Iranian rial, as their trade and economic interactions with Iran are already restricted. However, it can indirectly impact their policies and strategies towards Iran, potentially influencing the effectiveness of sanctions and diplomatic efforts.
Impacts of Strong or Stronger Iranian Rial:
1. Iran's Economy: A strong or stronger Iranian rial can have positive impacts on Iran's economy. It can help reduce inflationary pressures by making imported goods cheaper, stabilize prices, and improve the purchasing power of Iranian consumers. It may also attract foreign investment and improve economic stability.
2. Neighboring and Trade Partner Countries: A strong Iranian rial can benefit neighboring and trade partner countries by making Iranian exports relatively more expensive. This can improve the competitiveness of their own industries and reduce the trade deficit with Iran. However, it may also lead to a decline in trade volumes if Iranian goods become less affordable.
3. Oil Importing Countries: For oil-importing countries, a strong Iranian rial may increase the cost of Iranian oil, potentially impacting their energy expenses and trade balance. However, it can also provide stability to the global oil market if Iran's oil exports are significant.
4. European and Western Countries: A strong Iranian rial can reduce the cost of importing Iranian goods for European and Western countries. This can positively impact trade volumes and economic cooperation, potentially opening up new business opportunities and markets.
5. Asian Countries: The impact of a strong Iranian rial on Asian countries can depend on their trade relationships with Iran. If they are importers of Iranian goods, a strong rial may increase the cost of imports. On the other hand, if they export goods to Iran, a strong rial can enhance their competitiveness and increase export opportunities.
It's important to note that the actual impacts may vary depending on various factors, including the specific economic conditions, trade relationships, and policies implemented by the countries involved. Additionally, geopolitical considerations, sanctions regimes, and global market dynamics can also influence the outcomes.
Impacts of Weak Iranian Rial:
1. Neighboring Countries: A weak Iranian rial can have mixed effects on neighboring countries. It may lead to increased cross-border trade as Iranian goods become relatively cheaper for neighboring countries. However, it can also lead to economic challenges for countries heavily reliant on trade with Iran, as Iran may have reduced purchasing power for their exports.
2. Oil Exporting Countries: For oil-exporting countries, a weak Iranian rial can potentially increase their competitiveness in the global oil market. If Iran's oil exports become relatively cheaper due to the weak currency, it may put pressure on other oil-exporting countries to adjust their prices or compete more aggressively.
3. Oil Importing Countries: Oil-importing countries may benefit from a weak Iranian rial as it can lower their import costs of Iranian oil. This can positively impact their trade balance and reduce their energy expenses. However, this assumes that Iran continues to export oil despite potential economic challenges caused by the weak currency.
4. European and Western Countries: A weak Iranian rial can affect European and Western countries in several ways. It may increase the cost of imports from Iran, potentially leading to higher prices for Iranian goods in those markets. Additionally, it can impact trade volumes and economic cooperation with Iran, depending on the specific sanctions and restrictions in place.
5. Asian Countries: The impact of a weak Iranian rial on Asian countries can vary depending on their trade relationships with Iran. Asian countries that import goods from Iran may benefit from lower import costs, while those exporting to Iran may face challenges due to reduced purchasing power and demand.
6. Countries Sanctioning Iran: Countries that impose sanctions on Iran may see limited direct impact from a weak Iranian rial, as their trade and economic interactions with Iran are already restricted. However, it can indirectly impact their policies and strategies towards Iran, potentially influencing the effectiveness of sanctions and diplomatic efforts.
Impacts of Strong or Stronger Iranian Rial:
1. Iran's Economy: A strong or stronger Iranian rial can have positive impacts on Iran's economy. It can help reduce inflationary pressures by making imported goods cheaper, stabilize prices, and improve the purchasing power of Iranian consumers. It may also attract foreign investment and improve economic stability.
2. Neighboring and Trade Partner Countries: A strong Iranian rial can benefit neighboring and trade partner countries by making Iranian exports relatively more expensive. This can improve the competitiveness of their own industries and reduce the trade deficit with Iran. However, it may also lead to a decline in trade volumes if Iranian goods become less affordable.
3. Oil Importing Countries: For oil-importing countries, a strong Iranian rial may increase the cost of Iranian oil, potentially impacting their energy expenses and trade balance. However, it can also provide stability to the global oil market if Iran's oil exports are significant.
4. European and Western Countries: A strong Iranian rial can reduce the cost of importing Iranian goods for European and Western countries. This can positively impact trade volumes and economic cooperation, potentially opening up new business opportunities and markets.
5. Asian Countries: The impact of a strong Iranian rial on Asian countries can depend on their trade relationships with Iran. If they are importers of Iranian goods, a strong rial may increase the cost of imports. On the other hand, if they export goods to Iran, a strong rial can enhance their competitiveness and increase export opportunities.
It's important to note that the actual impacts may vary depending on various factors, including the specific economic conditions, trade relationships, and policies implemented by the countries involved. Additionally, geopolitical considerations, sanctions regimes, and global market dynamics can also influence the outcomes.
Comment:
Here are a few more points to consider regarding the impact of a weak Iranian rial on Iran's economy:
10. Trade Competitiveness: A weak rial can make Iranian exports more competitive in international markets. As the value of the currency decreases, Iranian goods become relatively cheaper for foreign buyers, potentially boosting export volumes. This can help increase export revenues, support domestic industries, and contribute to economic growth.
11. Tourism and Services Sector: A weak rial can make Iran an attractive destination for foreign tourists and travelers. As the cost of travel and services becomes relatively cheaper, it can encourage an influx of visitors, leading to increased tourism revenues. This can benefit sectors such as hospitality, transportation, restaurants, and other service-oriented industries, providing employment opportunities and economic stimulus.
12. Remittances: Iran has a significant diaspora living abroad, particularly in countries such as the United States, Canada, and European nations. A weak rial can make it more favorable for Iranians living abroad to send remittances back to their home country. Increased remittance inflows can provide a source of foreign currency and contribute to household incomes and consumption.
On the other hand, here are a few reasons why a weak Iranian rial can be detrimental to Iran's economy:
13. Import Dependency: Iran relies on imports for various essential goods, including food, medicine, and energy products. A weak rial can increase the cost of importing these items, leading to higher prices for consumers and potential shortages if the country faces difficulties in accessing foreign currency. This can impact the population's well-being and social stability.
14. Capital Flight: A weak rial can erode confidence in the domestic currency and prompt individuals and businesses to move their assets out of Iran to preserve their value. Capital flight can result in a loss of investment, reduced domestic economic activity, and a further weakening of the currency, creating a negative cycle for the economy.
15. Financial Stability: A weak rial can pose challenges to the stability of Iran's financial system. It can increase the risk of inflationary pressures, reduce the value of savings and deposits held in rials, and lead to currency volatility. This can undermine investor confidence, limit access to credit, and hinder long-term economic growth.
16. Inflationary Pressures: A weak rial can contribute to inflationary pressures within the Iranian economy. When the value of the currency declines, it can lead to higher prices for imported goods, raw materials, and intermediate inputs. This, in turn, can push up overall price levels, reducing purchasing power for consumers and potentially eroding living standards.
17. Dependency on Imports: Iran's domestic production capacity may not be sufficient to meet all its needs, particularly for technologically advanced goods
10. Trade Competitiveness: A weak rial can make Iranian exports more competitive in international markets. As the value of the currency decreases, Iranian goods become relatively cheaper for foreign buyers, potentially boosting export volumes. This can help increase export revenues, support domestic industries, and contribute to economic growth.
11. Tourism and Services Sector: A weak rial can make Iran an attractive destination for foreign tourists and travelers. As the cost of travel and services becomes relatively cheaper, it can encourage an influx of visitors, leading to increased tourism revenues. This can benefit sectors such as hospitality, transportation, restaurants, and other service-oriented industries, providing employment opportunities and economic stimulus.
12. Remittances: Iran has a significant diaspora living abroad, particularly in countries such as the United States, Canada, and European nations. A weak rial can make it more favorable for Iranians living abroad to send remittances back to their home country. Increased remittance inflows can provide a source of foreign currency and contribute to household incomes and consumption.
On the other hand, here are a few reasons why a weak Iranian rial can be detrimental to Iran's economy:
13. Import Dependency: Iran relies on imports for various essential goods, including food, medicine, and energy products. A weak rial can increase the cost of importing these items, leading to higher prices for consumers and potential shortages if the country faces difficulties in accessing foreign currency. This can impact the population's well-being and social stability.
14. Capital Flight: A weak rial can erode confidence in the domestic currency and prompt individuals and businesses to move their assets out of Iran to preserve their value. Capital flight can result in a loss of investment, reduced domestic economic activity, and a further weakening of the currency, creating a negative cycle for the economy.
15. Financial Stability: A weak rial can pose challenges to the stability of Iran's financial system. It can increase the risk of inflationary pressures, reduce the value of savings and deposits held in rials, and lead to currency volatility. This can undermine investor confidence, limit access to credit, and hinder long-term economic growth.
16. Inflationary Pressures: A weak rial can contribute to inflationary pressures within the Iranian economy. When the value of the currency declines, it can lead to higher prices for imported goods, raw materials, and intermediate inputs. This, in turn, can push up overall price levels, reducing purchasing power for consumers and potentially eroding living standards.
17. Dependency on Imports: Iran's domestic production capacity may not be sufficient to meet all its needs, particularly for technologically advanced goods
Comment:
Positive Impacts of Weak Iranian Rial:
Tourism: A weak Iranian rial can make Iran a more affordable destination for international tourists, potentially boosting the tourism industry and generating foreign exchange earnings.
Remittances: Iranians living abroad may find it more advantageous to send remittances back home when the Iranian rial is weak, as their foreign currency can have a greater purchasing power within Iran.
Competitiveness of Non-Oil Exports: A weak Iranian rial can enhance the competitiveness of non-oil exports from Iran, as they become relatively cheaper in international markets. This can potentially stimulate export-oriented industries and diversify the economy.
Negative Impacts of Weak Iranian Rial:
Inflation: A weak Iranian rial can contribute to inflationary pressures in the domestic economy. As the cost of imported goods rises, it can increase the overall price level, making everyday goods and services more expensive for Iranian consumers.
Imports and Consumer Goods: With a weak currency, the cost of importing goods from abroad becomes higher. This can lead to reduced availability and affordability of imported consumer goods, impacting the purchasing power and living standards of Iranians.
Capital Flight and Investment: A weak Iranian rial can erode confidence in the domestic currency, leading to capital flight as individuals and businesses seek to convert their rial holdings into more stable currencies. This can hinder domestic investment and economic growth.
Debt Burden: If Iran has borrowed in foreign currencies, a weak rial can increase the burden of servicing and repaying foreign debt, as the cost in domestic currency rises.
Positive Impacts of Strong or Stronger Iranian Rial:
Price Stability: A strong or stronger Iranian rial can contribute to price stability by reducing inflationary pressures. It can help stabilize prices of imported goods and services, making them more affordable for Iranian consumers.
Imports: A strong rial can improve the affordability of imported goods, enhancing the availability and variety of consumer products in the domestic market.
Reduced Import Costs: Iranian businesses that rely on imported raw materials and components may benefit from lower import costs, improving their competitiveness and profitability.
Foreign Investment: A strong or strengthening Iranian rial can attract foreign investment into the country. Foreign investors may find it more favorable to invest in Iran when the local currency is strong, as it reduces the risk of currency depreciation.
Negative Impacts of Strong or Stronger Iranian Rial:
Export Competitiveness: A strong Iranian rial can make Iranian exports relatively more expensive in international markets, potentially reducing their competitiveness and limiting export growth.
Trade Balance: A strong rial can increase the cost of imports, potentially widening the trade deficit if import volumes remain high.
Tourism: A strong rial can make Iran relatively more expensive for international tourists, potentially affecting the tourism industry and reducing foreign exchange earnings.
Manufacturing and Job Losses: A strong rial can negatively impact export-oriented industries, leading to reduced production and potential job losses in those sectors.
It's important to note that the impact of currency strength or weakness on a country's economy is complex and interconnected. It depends on a range of factors, including the country's economic structure, trade dynamics, fiscal policies, inflation rates, and global market conditions.
Tourism: A weak Iranian rial can make Iran a more affordable destination for international tourists, potentially boosting the tourism industry and generating foreign exchange earnings.
Remittances: Iranians living abroad may find it more advantageous to send remittances back home when the Iranian rial is weak, as their foreign currency can have a greater purchasing power within Iran.
Competitiveness of Non-Oil Exports: A weak Iranian rial can enhance the competitiveness of non-oil exports from Iran, as they become relatively cheaper in international markets. This can potentially stimulate export-oriented industries and diversify the economy.
Negative Impacts of Weak Iranian Rial:
Inflation: A weak Iranian rial can contribute to inflationary pressures in the domestic economy. As the cost of imported goods rises, it can increase the overall price level, making everyday goods and services more expensive for Iranian consumers.
Imports and Consumer Goods: With a weak currency, the cost of importing goods from abroad becomes higher. This can lead to reduced availability and affordability of imported consumer goods, impacting the purchasing power and living standards of Iranians.
Capital Flight and Investment: A weak Iranian rial can erode confidence in the domestic currency, leading to capital flight as individuals and businesses seek to convert their rial holdings into more stable currencies. This can hinder domestic investment and economic growth.
Debt Burden: If Iran has borrowed in foreign currencies, a weak rial can increase the burden of servicing and repaying foreign debt, as the cost in domestic currency rises.
Positive Impacts of Strong or Stronger Iranian Rial:
Price Stability: A strong or stronger Iranian rial can contribute to price stability by reducing inflationary pressures. It can help stabilize prices of imported goods and services, making them more affordable for Iranian consumers.
Imports: A strong rial can improve the affordability of imported goods, enhancing the availability and variety of consumer products in the domestic market.
Reduced Import Costs: Iranian businesses that rely on imported raw materials and components may benefit from lower import costs, improving their competitiveness and profitability.
Foreign Investment: A strong or strengthening Iranian rial can attract foreign investment into the country. Foreign investors may find it more favorable to invest in Iran when the local currency is strong, as it reduces the risk of currency depreciation.
Negative Impacts of Strong or Stronger Iranian Rial:
Export Competitiveness: A strong Iranian rial can make Iranian exports relatively more expensive in international markets, potentially reducing their competitiveness and limiting export growth.
Trade Balance: A strong rial can increase the cost of imports, potentially widening the trade deficit if import volumes remain high.
Tourism: A strong rial can make Iran relatively more expensive for international tourists, potentially affecting the tourism industry and reducing foreign exchange earnings.
Manufacturing and Job Losses: A strong rial can negatively impact export-oriented industries, leading to reduced production and potential job losses in those sectors.
It's important to note that the impact of currency strength or weakness on a country's economy is complex and interconnected. It depends on a range of factors, including the country's economic structure, trade dynamics, fiscal policies, inflation rates, and global market conditions.
Comment:
Here is an analysis of the positive and negative impacts of a weak and strong Japanese yen on various countries and regions:
Positive Impacts of Weak Japanese Yen:
Japanese Exports: A weak yen can boost Japanese exports by making them more price competitive in international markets. It makes Japanese goods relatively cheaper for foreign buyers, potentially increasing demand and stimulating export-oriented industries.
Tourism: A weak yen can attract more international tourists to Japan, as their foreign currencies can have greater purchasing power in the country. This can benefit the tourism industry and generate foreign exchange earnings.
Overseas Investments: A weak yen can encourage Japanese businesses and investors to seek opportunities abroad. It makes overseas investments relatively cheaper in terms of yen, potentially promoting outward foreign direct investment (FDI) and diversifying business activities.
Negative Impacts of Weak Japanese Yen:
Imported Inflation: A weak yen increases the cost of importing goods and raw materials, potentially leading to higher inflation. This can impact the purchasing power of Japanese consumers and erode their standard of living.
Energy Imports: Japan is heavily reliant on energy imports, particularly oil and natural gas. A weak yen increases the cost of energy imports, which can have adverse effects on energy-intensive industries and contribute to higher production costs.
Consumer Electronics: Japan is known for its consumer electronics industry. A weak yen can increase the cost of importing electronic components and materials, potentially affecting the competitiveness and profitability of Japanese electronic manufacturers.
Positive Impacts of Strong Japanese Yen:
Imported Goods: A strong yen makes imported goods relatively cheaper, benefiting Japanese consumers and potentially increasing their purchasing power.
Energy Costs: A strong yen reduces the cost of energy imports, which can benefit energy-intensive industries and help control production costs.
Travel and Education Abroad: A strong yen can make international travel and education abroad more affordable for Japanese citizens, potentially boosting outbound tourism and educational opportunities.
Negative Impacts of Strong Japanese Yen:
Japanese Exports: A strong yen can make Japanese exports relatively more expensive in international markets, potentially reducing their competitiveness and impacting export-oriented industries.
Tourism: A strong yen can make Japan relatively more expensive for international tourists, potentially affecting the tourism industry and reducing foreign exchange earnings.
Inflation and Deflation Concerns: A strong yen can exacerbate deflationary pressures in the Japanese economy, as it makes imported goods cheaper and can lead to lower domestic prices. This can hinder economic growth and pose challenges for policymakers.
It's important to note that the impact of currency strength or weakness on a country's economy can vary depending on various factors, including the country's economic structure, trade dynamics, fiscal policies, and global market conditions. The effects on specific countries or regions can also depend on their trade relationships, exchange rate policies, and economic interdependencies with Japan.
Positive Impacts of Weak Japanese Yen:
Japanese Exports: A weak yen can boost Japanese exports by making them more price competitive in international markets. It makes Japanese goods relatively cheaper for foreign buyers, potentially increasing demand and stimulating export-oriented industries.
Tourism: A weak yen can attract more international tourists to Japan, as their foreign currencies can have greater purchasing power in the country. This can benefit the tourism industry and generate foreign exchange earnings.
Overseas Investments: A weak yen can encourage Japanese businesses and investors to seek opportunities abroad. It makes overseas investments relatively cheaper in terms of yen, potentially promoting outward foreign direct investment (FDI) and diversifying business activities.
Negative Impacts of Weak Japanese Yen:
Imported Inflation: A weak yen increases the cost of importing goods and raw materials, potentially leading to higher inflation. This can impact the purchasing power of Japanese consumers and erode their standard of living.
Energy Imports: Japan is heavily reliant on energy imports, particularly oil and natural gas. A weak yen increases the cost of energy imports, which can have adverse effects on energy-intensive industries and contribute to higher production costs.
Consumer Electronics: Japan is known for its consumer electronics industry. A weak yen can increase the cost of importing electronic components and materials, potentially affecting the competitiveness and profitability of Japanese electronic manufacturers.
Positive Impacts of Strong Japanese Yen:
Imported Goods: A strong yen makes imported goods relatively cheaper, benefiting Japanese consumers and potentially increasing their purchasing power.
Energy Costs: A strong yen reduces the cost of energy imports, which can benefit energy-intensive industries and help control production costs.
Travel and Education Abroad: A strong yen can make international travel and education abroad more affordable for Japanese citizens, potentially boosting outbound tourism and educational opportunities.
Negative Impacts of Strong Japanese Yen:
Japanese Exports: A strong yen can make Japanese exports relatively more expensive in international markets, potentially reducing their competitiveness and impacting export-oriented industries.
Tourism: A strong yen can make Japan relatively more expensive for international tourists, potentially affecting the tourism industry and reducing foreign exchange earnings.
Inflation and Deflation Concerns: A strong yen can exacerbate deflationary pressures in the Japanese economy, as it makes imported goods cheaper and can lead to lower domestic prices. This can hinder economic growth and pose challenges for policymakers.
It's important to note that the impact of currency strength or weakness on a country's economy can vary depending on various factors, including the country's economic structure, trade dynamics, fiscal policies, and global market conditions. The effects on specific countries or regions can also depend on their trade relationships, exchange rate policies, and economic interdependencies with Japan.
Comment:
Dollar Index Hits 14-month Low
DXY decreased to a 14-month low of 100.61
Wall Street Rallies after Softer Inflation
US stocks surged on Wednesday after both headline and core inflation fell more than expected in June, reinforcing the view the Federal Reserve may stop the tightening campaign sooner than expected. The Dow Jones gained around 250 points to 34548, the highest level since November last year, with 3M and Goldman Sachs up nearly 2% and among the top performers. The S&P 500 added 0.9% 4477, a level not seen since April of 2022, led by shares in the consumer discretionary, tech and real estate sectors. The Nasdaq was up about 1.2% to 13906, also the highest since April last year. Traders are currently pricing in a 92% chance for a 25bps increase in the fed funds rate this month, while the odds for another quarter-point hike in September fell to 13% from 20% before the CPI release and in November eased to 26% from 34%.
Brazil Business Morale Rises to 8-Month High
The Industrial Entrepreneur Confidence Index (ICEI) in Brazil rose by 0.7 points from the previous month to an eight-month high of 51.1 in July of 2023. This marks the second consecutive month in which the industry has shown confidence, attributed primarily to a more positive evaluation of the current economic conditions (+1.3 points to 45.5). Also, the indicator of future expectations increased (+0.4 points to 53.9), indicating optimism for the next six months.
FTSE MIB Close Rise to 15-Year High
The FTSE MIB index closed 1.8% higher at 28,573 on Wednesday, outperforming other benchmark European indices amid sharp gains for its heavyweight financial sector as markets digested the soft US inflation print. American consumer prices rose by 3% annually in June, below estimates of 3.1%, benefitting from a slowdown in core consumer prices. The development lifted equities amid hopes that the Fed will be able to ease its hawkish pressure. Banks were among the sharpest gainers as BTP yields fell by 15bps, aiding their balance sheet with Banca MPS and Banco BPM both adding more than 2%. In the meantime, STMicroelectronics shares surged 4.8% amid recommendation updates from Jeffries and Citigroup.
DXY decreased to a 14-month low of 100.61
Wall Street Rallies after Softer Inflation
US stocks surged on Wednesday after both headline and core inflation fell more than expected in June, reinforcing the view the Federal Reserve may stop the tightening campaign sooner than expected. The Dow Jones gained around 250 points to 34548, the highest level since November last year, with 3M and Goldman Sachs up nearly 2% and among the top performers. The S&P 500 added 0.9% 4477, a level not seen since April of 2022, led by shares in the consumer discretionary, tech and real estate sectors. The Nasdaq was up about 1.2% to 13906, also the highest since April last year. Traders are currently pricing in a 92% chance for a 25bps increase in the fed funds rate this month, while the odds for another quarter-point hike in September fell to 13% from 20% before the CPI release and in November eased to 26% from 34%.
Brazil Business Morale Rises to 8-Month High
The Industrial Entrepreneur Confidence Index (ICEI) in Brazil rose by 0.7 points from the previous month to an eight-month high of 51.1 in July of 2023. This marks the second consecutive month in which the industry has shown confidence, attributed primarily to a more positive evaluation of the current economic conditions (+1.3 points to 45.5). Also, the indicator of future expectations increased (+0.4 points to 53.9), indicating optimism for the next six months.
FTSE MIB Close Rise to 15-Year High
The FTSE MIB index closed 1.8% higher at 28,573 on Wednesday, outperforming other benchmark European indices amid sharp gains for its heavyweight financial sector as markets digested the soft US inflation print. American consumer prices rose by 3% annually in June, below estimates of 3.1%, benefitting from a slowdown in core consumer prices. The development lifted equities amid hopes that the Fed will be able to ease its hawkish pressure. Banks were among the sharpest gainers as BTP yields fell by 15bps, aiding their balance sheet with Banca MPS and Banco BPM both adding more than 2%. In the meantime, STMicroelectronics shares surged 4.8% amid recommendation updates from Jeffries and Citigroup.
Comment:
Wall Street Ends Higher after CPI
The RICS UK Residential Market Survey house price balance, which measures the gap between the percentage of respondents seeing rises and falls in house prices, fell to -46 in June 2023 from -30 in May, posting the weakest reading in four months and coming in below forecasts of -34. This points to a slowdown in the British housing market as higher borrowing costs weighed on demand, with average two-year fixed mortgage rates in the country recently hitting a 15-year high. Expectations that the Bank of England will raise interest rates further this year to bring down inflation also dampened sentiment. Simon Rubinsohn, chief economics at RICS, said: “The latest increase in interest rates and the impact this has already had on mortgage rates is clearly visible in buyer enquiries, sales and prices which have all retreated over the past month.”
The BusinessNZ Performance of Manufacturing Index in New Zealand fell to 47.5 in June 2023 from 48.9 in the previous month. It marked the fourth straight month of contraction in the manufacturing sector and the steepest since last November as activities negatively influenced by declining demand, cost increases and production/staffing issues as the key negative influences on activity for the current month. Production (47.5 vs 45.7 in May) remained subdued and new orders (43.8 vs 50.8) fell back to contraction zone. Meanwhile, employment (47 vs 49.5) contracted further while deliveries (50.5 vs 46) rebounded.
Brazil’s Ibovespa stock index gave up on earlier gains to close 0.1% higher to finish around 117,700 on Wednesday, inline with global positive mood, after the US inflation data came in below expectations in June, even the core measures, suggesting a possible turning point for Federal Reserve policymakers in the coming months. On the domestic data front, services activity in Brazil grew by a more-than-expected 0.9% in May, following a decline of 1.5% in the previous month, placing the sector 11.5% above the pre-pandemic level of February 2020. On the corporate front, shares in the world's largest meatpacker JBS surged 9%, the most in the index, after proposing a dual listing of shares in Sao Paulo and New York in a securities filing today. It was followed by B3 (+2.4%), Gerdau (+2.1%) and PetroRio (+2%).
The RICS UK Residential Market Survey house price balance, which measures the gap between the percentage of respondents seeing rises and falls in house prices, fell to -46 in June 2023 from -30 in May, posting the weakest reading in four months and coming in below forecasts of -34. This points to a slowdown in the British housing market as higher borrowing costs weighed on demand, with average two-year fixed mortgage rates in the country recently hitting a 15-year high. Expectations that the Bank of England will raise interest rates further this year to bring down inflation also dampened sentiment. Simon Rubinsohn, chief economics at RICS, said: “The latest increase in interest rates and the impact this has already had on mortgage rates is clearly visible in buyer enquiries, sales and prices which have all retreated over the past month.”
The BusinessNZ Performance of Manufacturing Index in New Zealand fell to 47.5 in June 2023 from 48.9 in the previous month. It marked the fourth straight month of contraction in the manufacturing sector and the steepest since last November as activities negatively influenced by declining demand, cost increases and production/staffing issues as the key negative influences on activity for the current month. Production (47.5 vs 45.7 in May) remained subdued and new orders (43.8 vs 50.8) fell back to contraction zone. Meanwhile, employment (47 vs 49.5) contracted further while deliveries (50.5 vs 46) rebounded.
Brazil’s Ibovespa stock index gave up on earlier gains to close 0.1% higher to finish around 117,700 on Wednesday, inline with global positive mood, after the US inflation data came in below expectations in June, even the core measures, suggesting a possible turning point for Federal Reserve policymakers in the coming months. On the domestic data front, services activity in Brazil grew by a more-than-expected 0.9% in May, following a decline of 1.5% in the previous month, placing the sector 11.5% above the pre-pandemic level of February 2020. On the corporate front, shares in the world's largest meatpacker JBS surged 9%, the most in the index, after proposing a dual listing of shares in Sao Paulo and New York in a securities filing today. It was followed by B3 (+2.4%), Gerdau (+2.1%) and PetroRio (+2%).
Comment:
China New Home Prices Flatten in June
Average new home prices in China's 70 major cities were flat year-on-year in June 2023 after edging up 0.1 percent in the previous month. Among the biggest Chinese cities, prices increased in Beijing (3.5% vs 4.3% in May), Chongqing (0.6% vs 1.3%), Shanghai (4.8% vs 4.9%), and Tianjin (0.2% vs -0.3%). By contrast, cost fell in both Shenzhen (-2.4% vs -0.2%) and Guangzhou (-0.8% vs -0.4%). On a monthly basis, new home prices were unchanged, the weakest result so far this year, as as broad efforts from Beijing have not revived the ailing prope
Average new home prices in China's 70 major cities were flat year-on-year in June 2023 after edging up 0.1 percent in the previous month. Among the biggest Chinese cities, prices increased in Beijing (3.5% vs 4.3% in May), Chongqing (0.6% vs 1.3%), Shanghai (4.8% vs 4.9%), and Tianjin (0.2% vs -0.3%). By contrast, cost fell in both Shenzhen (-2.4% vs -0.2%) and Guangzhou (-0.8% vs -0.4%). On a monthly basis, new home prices were unchanged, the weakest result so far this year, as as broad efforts from Beijing have not revived the ailing prope
Comment:
This trade is still open and active
Government Bond Yields Fall for 2nd Session
Government bond yields around the world fell for a second day on Tuesday, with the US 10-year Treasury note yield, seen as a proxy for global borrowing costs, retreating to 3.76%, a level not seen since late June. Investors are getting increasingly convinced that major central banks, and specially the Federal Reserve, will soon end their tightening campaign. Bets for a 25bps hike in the fed funds rate next week currently stand at 97% but investors remain divided on the need of further increases, with chances for a September increase currently standing at 12% and for November at 22%. Meanwhile, the ECB is also set to raise rates by 25bps again next week while there is just a 70% chance of a further rate rise in September. The Bank of England will decide on monetary policy in August only, but either a 25bps or a 50bps hike are seen as certain. On the other hand, traders are increasingly speculating the Bank of Japan could adjust its ultra loose monetary policy next week.
The yield on the German 10-year government bond fell to 2.4%, down from the four-month high of 2.679% reached on July 10, as signs of cooling inflation in the US increased speculation that the Federal Reserve is approaching the end of a series of significant interest rate hikes. Nevertheless, the European Central Bank is expected to persist with raising rates throughout the year, aiming for a deposit rate peak of 4% by year-end. However, a recent batch of weak economic data from across the region might prompt the central bank to revise its inflation forecasts in September, possibly leaving the deposit facility rate at 3.75%. Hawkish ECB policymaker Joachim Nagel expressed caution on Monday about further tightening moves in September, stating that "we will see what the data will tell us." In addition, his colleague Klaas Knot said monetary tightening beyond July’s meeting is anything but guaranteed.
Turkish Lira Weakens to Fresh Record Low
The Turkish lira weakened more than 2% to a fresh record low of 26.9 per USD, as both the central bank and state-run banks stopped supporting the currency ahead of the central bank monetary policy decision on Thursday. Most investors expect a 500bps increase in interest rates, although some market participants said the rise could be smaller. On June 22nd, the central bank of Turkey raised interest rates by 650 bps to 15%, marking a reversal from its previous ultra-loose and unorthodox monetary policy although the move fell short of meeting market expectations for a higher rate of 21%
Euro Hits Fresh 17-Month High
The euro strengthened its position above $1.12, reaching its highest level since February 2022, on the back of investor expectations that the European Central Bank will continue its rate-hike cycle to tackle inflation and bring it closer to the 2% target. In the Eurozone, inflation declined to a 17-month low of 5.5% in June, but the core rate remained stubbornly high at 5.4%, still close to the all-time high of 5.7% seen in March. Currently, the interest rates in the bloc stand at 3.5%, but traders anticipate rates peaking at 4% by the end of the year. However, a recent batch of weak economic data from across the region might prompt the central bank to revise its inflation forecasts in September, possibly leaving the deposit facility rate at 3.75%. Simultaneously, the recently released weaker-than-expected US inflation data has fueled speculations that the Federal Reserve is nearing the conclusion of its current policy tightening measures.
Government Bond Yields Fall for 2nd Session
Government bond yields around the world fell for a second day on Tuesday, with the US 10-year Treasury note yield, seen as a proxy for global borrowing costs, retreating to 3.76%, a level not seen since late June. Investors are getting increasingly convinced that major central banks, and specially the Federal Reserve, will soon end their tightening campaign. Bets for a 25bps hike in the fed funds rate next week currently stand at 97% but investors remain divided on the need of further increases, with chances for a September increase currently standing at 12% and for November at 22%. Meanwhile, the ECB is also set to raise rates by 25bps again next week while there is just a 70% chance of a further rate rise in September. The Bank of England will decide on monetary policy in August only, but either a 25bps or a 50bps hike are seen as certain. On the other hand, traders are increasingly speculating the Bank of Japan could adjust its ultra loose monetary policy next week.
The yield on the German 10-year government bond fell to 2.4%, down from the four-month high of 2.679% reached on July 10, as signs of cooling inflation in the US increased speculation that the Federal Reserve is approaching the end of a series of significant interest rate hikes. Nevertheless, the European Central Bank is expected to persist with raising rates throughout the year, aiming for a deposit rate peak of 4% by year-end. However, a recent batch of weak economic data from across the region might prompt the central bank to revise its inflation forecasts in September, possibly leaving the deposit facility rate at 3.75%. Hawkish ECB policymaker Joachim Nagel expressed caution on Monday about further tightening moves in September, stating that "we will see what the data will tell us." In addition, his colleague Klaas Knot said monetary tightening beyond July’s meeting is anything but guaranteed.
Turkish Lira Weakens to Fresh Record Low
The Turkish lira weakened more than 2% to a fresh record low of 26.9 per USD, as both the central bank and state-run banks stopped supporting the currency ahead of the central bank monetary policy decision on Thursday. Most investors expect a 500bps increase in interest rates, although some market participants said the rise could be smaller. On June 22nd, the central bank of Turkey raised interest rates by 650 bps to 15%, marking a reversal from its previous ultra-loose and unorthodox monetary policy although the move fell short of meeting market expectations for a higher rate of 21%
Euro Hits Fresh 17-Month High
The euro strengthened its position above $1.12, reaching its highest level since February 2022, on the back of investor expectations that the European Central Bank will continue its rate-hike cycle to tackle inflation and bring it closer to the 2% target. In the Eurozone, inflation declined to a 17-month low of 5.5% in June, but the core rate remained stubbornly high at 5.4%, still close to the all-time high of 5.7% seen in March. Currently, the interest rates in the bloc stand at 3.5%, but traders anticipate rates peaking at 4% by the end of the year. However, a recent batch of weak economic data from across the region might prompt the central bank to revise its inflation forecasts in September, possibly leaving the deposit facility rate at 3.75%. Simultaneously, the recently released weaker-than-expected US inflation data has fueled speculations that the Federal Reserve is nearing the conclusion of its current policy tightening measures.
Comment:
Trade is open
The Dow Jones was down over 100 points and the S&P 500 dipped by 0.1% on Wednesday afternoon, on the prospect of further interest rate hikes following the Federal Reserve's chair Powell Speech at the ECB Forum. He said he does not see inflation reaching the Fed's 2% target any time soon. He reiterated that interest rates will rise further and did not rule out a boost in the cost of borrowing at the next policy meeting scheduled for the end of July. Meantime, the Nasdaq was up 0.2% powered by megacap momentum stocks. Among stocks, shares of Nvidia and Advanced Micro Devices were down by 2% and 1%, respectively, after the US government is considering new restrictions on exports of AI chips to China. Intel, Applied Materials and Qualcomm fell more than 2% each. On the other hand, Apple hit an all-time high of $189.8 during the session, while shares of Tesla and Alphabet advanced 1.4% and 2.5%. The Fed is due to release the results of its annual stress tests to banks.