Iran’s Economy vs. FX market; Round One!
USD/IRR; Where to?!
By Alireza Hojjatnia
An enigma in Iran’s Economy with no doubt, is the ambivalence in counting for FX rate volatilities. The fact that the rates cannot be predicted even for a short window without speculations is more than enough to make the case concrete solid. Despite the bustle within the acting administration to rein the FX leash over the past few months, recent hikes in USD/IRR rates proved once again that the foreign currency market is not immune to provocative triggers. It seems that the affair between FX volatilities beat and domestic and international political weather is from the heart bottom; a cohesion to lead the market trajectory over short term. Now the question is where on earth this train is headed, specially inches away from the presidential election?
Although, the 12th presidential campaign might force the government to put a damper on the case for now and try to hamper any upcoming swings away. Also hitherward, the FX market fundamentals are not in a pushy position exciting the rates to record higher. Foreign exchange earnings, inflation and trade balance are just so stable that unless a dark force puts a hand in, the market trend would be silent for now.
While the basics currently make a pledge for a secure FX rates, yet a few causes can rip the current peace into shreds. The below five factors are the most daring of those to be counted as impending threats.
Regardless of the fact that why USD/IRR flown in the face of market with a few jumps over the past months, it shall be noted that more political shocks, with even worse impacts on fundamentals, in near future are imminent. The response to United States election from Iran’s side and the US president elect devotion to honor the JCPoA are the bold of these. It is convincible that recent openings in banking transaction might be in danger hence make the FX supply to face challenges next year.
Using the economics!
Using the PPP theory on USD/IRR, devaluating Rial for the difference of domestic and foreign inflation (economic studies projected a 12-14% inflation for the upcoming year), an equilibrium rate of 41,700 is not far-fetched; a rate that caused chaos on the ground the other week. Perhaps if the administration had tried not to suppress the rates, by now the economy would have digested the new FX situation.
Considering the differential of two nations’ inflation rate over time, in a case for USD/IRR, and comparing the available data to the real thing happened to FX rate over Iran streets, it is evident that forcing the currency down in a couple of occasions had nothing but a libertine bounce of the rate eventually; a tip to the administration that relaxing the grip might end up in a non- hysterical down to earth growth of FX rate.
What to look for in forecasts?!
A crystal clear forecast needs to be given over delicate consideration of weighing factors from different viewpoints. Below a few reasonable facts are mentioned showing the reality of the FX trend for 2017/18.
- Estimations show that next year’s FX flow would be toward profiting the trade balance positive; a witness to the stable runway ahead. Iran have the potential to export USD 80-85 bn whilst the figures for 2016/17 were around USD 60-65 bn.
- FX calculations for upcoming year shall not be only based on the presented economic projection figures. Both international and domestic market can be stroked by political tensions, therefore nice and steady global markets are more like a dream.
- A couple of incidents impacted the whole Psychological Climate of domestic markets in the current year and it is believed that the aftermaths will also be dragged to 2017/18. First, the public opinion on stability of the money market, to be specific the banking sector, are considered as pessimistic which led the depositors to drain their accounts in favor of other investment opportunities, (e.g. Islamic T-Bills). Concurrence of this sudden change in social view with the meteoric rise of USD/IRR rate to 42,000 have led to a phenomenal turn in market sentiment, driving participants to make big dollar purchases even in highly volatile time frames.
- Although the CBI’s stats show a positive remainder on the trade balance, yet it has to be mentioned that unavoidable amounts of currency transactions are not reflected in central bank’s accounts. Imports from border markets, incoming and outgoing travel currency, Contrabands, etc. are just a few to be named. All this figures add to trade balance and it might result in a deficit or even an excess to the account.
- It is true that oil revenues will be at record high for the next year and consequently the anticipations on currency supplies are hopeful, yet the unseen fact remains that all these oil revenues are hardly ever in hands of CBT in a neat manner. Needless to say USA’s unpredictable policy changes will affect the matter even worse. The restricted access is going to make large currency supplies a nightmare and considering the fact that this might happen on occasions, the whole oil revenues dream will turn into a house of cards.
- Next year the nation will face with a unified exchange rate, at least promised many times now; it seems that the promise will be postponed until after the election. Moreover, it is hardly believed for the FX rate to have a floating rate for the fact that neither the government and parliament nor the Central Bank could bear the risk of leaving currency pricing into the supply-demand equation, ergo the FX controls are going to be in place as always. All these will make a rate jump more feasible in 2017/18.
All in all, although the economic variables are in favor of a stable foreign currency market, the noneconomic factors are the ones that not only herald but also are capable of creating a perfect storm dragging the FX trades from their current normal status to a battleground. It is widely believed that 2017/18 is for a better economic growth yet with all the turbulence. Needless to say, the whole situation is a cloud on the horizon and highly responsive to what politics will bring to the nation; it is safe to assume that after the approaching election, the FX market rout could be entirely out of balance and truth be told, it would be easier to deal with the outcomes if all decide to face the facts before fat hits the fire.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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