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Gold & oil volatility grows amid Middle East escalationFinancial markets are bracing for the uncertainty surrounding Iran's recent strike on Israel and the potential for retaliatory measures. Mohamed A. El-Erian, Chief Economic Adviser at Allianz, remarked that the current situation may lead to elevated gold and oil prices, alongside lower US Treasury yields and stocks compared to what would have been expected otherwise. In the previous week, investors flocked to gold, driving it to reach new record highs. Will we see more records hit this week? Early trading this Monday Asian session has shown a gap upwards. Since April 1st, the energy market has been on edge regarding a potential Iran-Israel conflict, hinting at the likelihood of highly volatile oil trading in the upcoming week. Additionally, concerns arise over signs of Iran's inclination towards a soft blockade of the Strait of Hormuz, which could result in supply chain disruptions and increased oil prices. The escalating tensions may also further prompt the Federal Reserve to exercise caution in interest rate cuts, as higher oil prices could steer inflation away from the Fed's target. On Friday, the U.S. dollar index surged to its highest level since November, while the euro dipped to a five-month low against the dollar following indications from the European Central Bank of potential interest rate cuts. This broad strengthening of the dollar also drove the yen to a fresh 34-year low as investors monitored for potential intervention by Japanese monetary authorities to stabilize the currency.
BLACKBULL:XAUUSD
by BlackBull_Markets
📈Bitcoin: Geopolitical Tensions Impact Market Dynamics🚨🔍Today, we're focusing on Bitcoin, which has formed a range box in the 4-hour timeframe between 63054 and 73305. Following the uptrend from 40k, this consolidation phase is a logical pause, potentially leading to a correction in the weekly timeframe, especially considering the imminent Halving event, which may precede a bullish rally. ⚡️In range-bound markets, whales often execute buy or sell orders within these ranges. We shouldn't play into the hands of these whales; therefore, it's better to be patient and wait for a breakout above 73305 for a long position, or wait for the candle to close below 63054 for a short position. 📊The volume of red candles is significantly high, partly due to the sharp decline we witnessed last night following Iran's attack on Israeli soil, causing a 20-40% decline in most altcoins. However, Bitcoin found support at 63054, preventing further decline. 💥The RSI indicator dipped into oversold territory and bounced back, currently oscillating near the 30 mark. A move into oversold territory coupled with candlestick confirmation could trigger another sharp decline, potentially coinciding with news of further conflict between Iran and Israel. ⚡️The POC (Point of Control) in the fixed range volume profile was lost last night, with attention now focused on 63054. If this level is breached, Bitcoin could test the 52k range. 📝Finally, it's essential to note that at the onset of a conflict, markets initially experience a downturn as governments aim to increase liquidity. However, Bitcoin tends to appreciate afterward, as individuals in conflict-stricken countries seek to move their assets abroad, making Bitcoin the preferred choice. This could mark the beginning of the 2024 bull run. 🧠💼It's important to acknowledge the inherent risks in futures trading, with the potential for margin calls if risk management is neglected. Always adhere to strict capital management principles and utilize stop-loss orders, ensuring that the initial target offers a risk-to-reward ratio of 2
by itsparham96
A Speed Bump or a Sign of Things to Come?The recent dip in the crypto market, triggered by escalating tensions between Iran and Israel, serves as a stark reminder of the market's volatility. Bitcoin prices plummeted to GETTEX:59K before a swift recovery, leaving many investors wondering: was this a blip on the radar or a harbinger of things to come? **The Iran-Israel Factor:** Geopolitical tensions have historically impacted traditional markets, and crypto appears increasingly susceptible as well. The news of a potential war undoubtedly spooked investors, leading to a sell-off. However, the market's swift bounce back suggests that the long-term outlook might remain bullish. **Bull Run on Hold?** The upcoming Bitcoin halving, scheduled for sometime in 2024, is a highly anticipated event that often precedes bull runs. While the recent crash might cause a temporary setback, historical data suggests that these halvings often lead to price increases due to a reduced supply of new Bitcoins. **Full-Fledged War? A Bearish Threat?** A full-blown war would undoubtedly have a significant negative impact on global markets, including crypto. Increased risk aversion and economic uncertainty could trigger a prolonged bear market. It's important to monitor the situation closely and adjust your strategy accordingly. **The Power of Diversification:** Regardless of the bull or bear market predictions, diversification remains a crucial strategy. Spreading your investments across various cryptocurrencies and asset classes can help mitigate risk. **The Final Word: It's All Speculation** The future of the crypto market, especially in light of geopolitical events, is inherently uncertain. While a bull run is still possible after the halving, external factors can always play a role. Here's where **you** come in! Join the discussion in the comments below!** Share your thoughts: * Do you think the recent crash is a sign of a larger correction? * How will a potential full-fledged war impact the crypto market? * What strategies are you using to navigate the current market climate? **By fostering a community of informed investors, we can all navigate the ever-evolving world of cryptocurrency.** **Disclaimer:** This is for informational purposes only and should not be considered financial advice. Always conduct your own research and consult with a financial professional before making any investment decisions.
by OMGiTzREALHASSAN
2
Why both Gold & U.S. Dollar Index are rising ? (IMPORTANT)The Intricate Dance of Gold and the U.S. Dollar The relationship between the U.S. Dollar Index (DXY) and Gold prices is a fascinating study in economics. Typically, these two have a reverse correlation. The reason for this inverse relationship is that gold is priced in U.S. dollars. Therefore, when the dollar strengthens, gold becomes more expensive for investors using other currencies. This can decrease demand for gold and subsequently lower its price. However, this correlation is not set in stone. There are times when both the DXY and gold prices can increase simultaneously. This can occur due to a variety of factors such as geopolitical tensions, market uncertainty, or changes in monetary policy. For instance, from early 2022 to the beginning of 2024, the correlation between gold and the DXY has seen periods of both synchronicity and divergence. This indicates that other factors are influencing gold prices. Currently, despite the rising DXY, gold prices are also on an upward trend. This could be attributed to investors seeking safe-haven assets amidst economic or geopolitical uncertainty. This increases the demand for gold, driving up its price even as the dollar strengthens. Additionally, expectations of changes in monetary policy, such as interest rate cuts, can also affect gold prices. In conclusion, while the DXY and gold prices often move in opposite directions, there are times when they dance to the same tune. This intricate dance is influenced by a myriad of factors, making the relationship between the DXY and gold prices a complex and intriguing aspect of global economics. Prepared by : Arman Shaban
OANDA:XAUUSDEducation
by ArmanShabanTrading
7
Oil’s Tug-of-War: Iran Tensions vs. Evergrande Oil’s Tug-of-War: Iran Tensions vs. Evergrande On Wednesday, WTI crude futures dropped below $77 per barrel, undoing a 1.4% increase from the prior session, all while the U.S. readies itself to address a lethal attack on its troops in the Middle East. Perhaps traders are concerned more about the liquidation of China Evergrande, raising worries about the overall Chinese economy. There is fear that this uncertainty in China could lead to a decrease in demand for crude oil. However, there is a question of whether traders might be underestimating the potential for U.S. responses to the lethal attacks to escalate tensions or lead to a conflict with Iran. Despite President Biden expressing a desire to avoid a wider war in the Middle East, there are concerns about the unpredictable outcomes of such military actions. The Guardian predicts dire consequences if there is direct American military retaliation against Iran. This could prolong the Gaza conflict, trigger a Hezbollah attack on Israel, escalate conflicts in Iraq and Syria, and destabilize friendly regimes in Egypt, Jordan, and the Gulf. Additionally, such actions could inadvertently assist China in pursuing its anti-democratic geopolitical ambitions and provide justification for Russia's aggression in Ukraine.
BLACKBULL:WTI
by BlackBull_Markets
advances to near $2,055 as US yields declineHere is what you need to know on Monday, January 15: • Gold price gains ground on risk-averse sentiment due to the Red Sea situation. Israel-Gaza conflict intensified after Houthi attacked a US Navy vessel. • US Treasury yields contribute to downward pressure on the US Dollar. Barclays revision of the Fed rate cut has changed market sentiment. Gold prices continue to advance for the third consecutive day on Monday, trading higher and reaching around $2,055 per troy ounce during the Asian session. The upward movement in the price of the yellow metal is attributed to the risk-averse due to the geopolitical tensions in the Middle East, coupled with the speculation regarding potential rate cuts by the Federal Reserve (Fed) in March. The concerns over the escalation of the Israel-Gaza conflict have intensified, especially after Iran-led Houthis fired an anti-ship cruise missile at the USS Laboon in the Red Sea on Monday. This development has contributed to increased demand for gold prices, a traditional safe-haven asset during times of heightened geopolitical uncertainty. Market participants remain vigilant for potential impacts on shipments in the Strait of Hormuz while closely monitoring Iran's response to recent geopolitical developments. The US Dollar (USD) hovers around 102.40 with a negative bias, influenced by the decline in US Treasury yields, possibly triggered by the softer Producer Price Index (PPI) data from the United States (US). The DXY has trimmed its intraday gains as a result of the drop in US Treasury yields. The 2-year and 10-year yields on US bond coupons trade lower at 4.14% and 3.94%, respectively, at the moment. Additionally, Barclays revised its forecast on Friday for the first Federal Reserve rate cut, moving it to March from June. This change in outlook has shifted market sentiment towards expectations of an easing monetary policy by the Fed, putting downward pressure on the Greenback. In a note released on Friday, analysts from Barclays expressed their expectation for the Federal Open Market Committee (FOMC) to reduce the Fed Funds rate by 25 basis points at the March meeting.
OANDA:XAUUSDLong
by sniper_2022
$UVXY $120+ BUY CALLSUVXY is a volatility factor in the market. As political tensions rise high in the world, we are due for another market correction and overall world market corrections. USA of course is protecting its interest in the Middle East and as we can see, Israel-Palestine conflict is only getting started. This is a multi-decade war between Israel and Arab/Muslim states. However, this war is not going to be similar to previous, this will be final and deciding war in that region, after which, nothing will be left there and geographical borders will change. This is a political game because of all the resources hidden, particularly Oil, in the Middle East. I believe this time we will see a use of nuclear weapons. There will be de-stabilization in that region and rest of the world. UVXY will spike due to this. I'm not sure about my timing, but I see these tensions rising very high and markets staying volatile within near future. Please check out my other predictions as they are fairly accurate, I don't post a lot, but I think this time I might be right.
CBOE:UVXYLong
by toich312
1
Gold BUY Tensions RiseDear Ziilllaatrades, We'd like to discuss a potential chain of events where an invasion of Israel into Palestine could trigger Iran's involvement in the conflict, causing a rise in gold prices. Here's how this chain of events might unfold: 1. Invasion of Israel into Palestine: If Israel were to launch a large-scale military invasion into Palestinian territories, it would likely draw significant international attention and condemnation. This action would intensify tensions in the region and lead to a surge in violence, displacement of civilians, and potential casualties. 2. Iran's Involvement: Iran has been a long-standing supporter of Palestinian causes, particularly through its support for groups like Hamas and Hezbollah. If Israel's actions are perceived as a significant threat to Palestinian territories and civilians, Iran may feel compelled to intervene in the conflict to protect its interests and regional influence. Iran could provide financial, military, and logistical support to Palestinian factions, escalating the conflict and potentially involving Iranian military forces. 3. Escalation of Regional Tensions: The involvement of Iran in the conflict would escalate regional tensions and may lead to the activation of regional alliances and rivalries. Israel's allies, including the United States, may respond with increased military and diplomatic support. This could lead to a broader regional conflict, potentially involving other countries in the Middle East. 4. Market Uncertainty and Safe-Haven Demand: Geopolitical instability and conflict in the Middle East tend to increase market uncertainty and risk aversion. Investors often turn to safe-haven assets like gold during times of geopolitical turmoil, as gold is traditionally seen as a store of value and a hedge against economic instability. The rising tensions in the Middle East, including the involvement of Iran, could lead to increased demand for gold, driving up its prices. 5. Impact on Gold Prices: As investors seek refuge in safe-haven assets like gold, increased demand could cause gold prices to rise. The extent of the price increase would depend on the severity of the conflict, the duration of the crisis, and the global response to the situation. Gold prices can also be influenced by a variety of factors, including economic conditions, currency movements, and supply and demand dynamics. It's important to note that this scenario is hypothetical, and the actual outcome of any such conflict and its impact on gold prices would depend on a wide range of complex and dynamic factors. Geopolitical events can indeed influence commodity prices, including gold, but predicting the extent of that impact is challenging. Feel free to ask any questions, Greetings, Ziilllaatrades
OANDA:XAUUSDLong
by ZILATRADES
Middle East conflict up, oil up, gold up, defense stocks upWTI and Brent crude futures both jumped more than 4% to above $86 and $88 per barrel, respectively, on Monday, after a surprise attack by Hamas on Israel over the weekend. More than 900 Israelis have lost their lives, with 130 more held hostage, and nearly 700 Palestinians have been killed in Israel’s retaliation. A truce is unlikely in the short term. Investors are wary of a wider conflict too. Gold jumped 1.45% to around $1,850 an ounce on Monday, adding to the 0.7% gain the metal made on Friday (as the Non-Farm Payrolls jobs report came in ridiculously stronger than expected). In some cases, investors are not wary, but welcome a wider conflict, with defense stocks in the US being some of the better performing on Monday. Raytheon (+4.5%), Lockheed Martin (+8.5%), and Northrop Grumman (+11.2%) all recording some of their best daily gains in some time. A question that arises, and which could affect oil markets is; what was Iran’s contribution to the situation, if any? Tehran has denied involvement but did commend the attack. Investors will be looking for any events that could affect supply from Iran (they currently send 1.5 million barrels per day to China) or through Iran (via the Strait of Hormuz which is vital for about 30% of oil supply). In any case, the world might be facing higher-for-longer oil prices.
BLACKBULL:USOIL.F
by BlackBull_Markets
EURUSD | Trend forecastingIn last week's video, full explanations were given that the price will be revised And I said to wait until the first FVG at least But this week, I want to remind you that 50% of this FVG has been rejected and the candle has closed below that. This means that it is likely that the EU will continue to move towards lower liquidity and we should expect a further correction to a lower FVG. If you see signs of rising in this FVG, go LONG, but I think this will happen Only, I "probably" that the price will reach lower liquidity
Short
by mohammadsamiei
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.
Long
by DaveBrascoFX
2