Economy, Business And Markets

Investors Undecided on Direction

Investors Undecided on DirectionInvestors Undecided on Direction

The foreign exchange market remained reserved in the week following the accord reached over the scale of Iran’s nuclear activities.

Investors surprised analysts, who had predicted a run on the rial following the deal between Iran and P5+1—the United States, Britain, France, Russia, China and Germany—on July 14, by favoring foreign currencies against the rial.

A cautious mood prevailed over Ferdowsi Street—the hub of foreign exchange trading in Tehran—during the past working week as investors held their foreign exchange holdings.

Many traders believed the optimism of signing the deal, known as the Joint Comprehensive Plan of Action, was already priced in the market.

Others said they were wary of overreaction to news about the Iran-P5+1 deal and wanted to wait for its full implementation, which may take a year.

Ferdowsi’s currency of choice, the US dollar, has risen 2% since the signing of the JCPOA. The greenback was flirting with the 32,000-rial resistance level as news of the deal spread and sank to a five-month low of 31,850 rials. However, it later advanced to the week’s peak of 32,800 rials on July 15.

There has been a push and pull between bears and bulls in the market during the past week, with neither gaining the upper hand.

Volatility has returned to Ferdowsi this month, after two months of trading in tight ranges—as investors remained on edge due to the ongoing nuclear talks—with the dollar’s trading range doubling in July.

Although other international developments had a hand in influencing foreign exchange rates in Iran in the past month, the nuclear negotiations remained front and center on Ferdowsi Street.

The euro, which has been pressured by the Greek debt crisis, had a rough ride in Tehran. It has been pushed to near four-month lows against the rial. Despite fluctuations, it has remained flat for the past week.

 Central Bank’s Countermove

The Central Bank of Iran, on the other hand, is slowly moving its offered rates higher toward the market rates, weakening the rial. Pundits have called on the bank to unify Iran’s multiple exchange rate regime to create transparency, root out corruption in the foreign exchange market and improve business environment.

The bank raised its dollar exchange rate 1.4% to an all-time high of 29,569 rials during the past month, bringing the gap between the two rates to around 10% for the first time since Iran reverted to a multiple exchange rate regime in 2012.

The central bank’s governor, Valiollah Seif, said earlier this month that the bank will abandon the dual exchange rate regime and adopt a managed float six months after a deal is signed. He changed his estimate to eight to 10 months in a new statement to the press this week.

The governor has signaled a 32,000-rial-per-dollar exchange rate as the central bank’s target for the near future. The bank argues that prices around this range will benefit the Iranian economy, especially exporters. This has been disputed by experts.

 Wednesday’s Trade

Investors shied away from stocks and favored foreign currencies on Wednesday.

The dollar broke its three-day losing streak and advanced 0.71% to 32,670 rials by 1035 GMT, lifting other currencies against the rial.

Meanwhile, Tehran Stock Exchange’s main index lost 0.6% and fell to an eight-day low of 67,644.30 point on losses from petroleum shares and the Islamic Republic of Iran Shipping Lines, Iran’s largest cargo ship operator.

The euro gained the most on Ferdowsi Street, jumping 1.27% to 35,950 rials on Wednesday, on the back of late overnight gains in America. The euro on Tuesday rebounded from three-month lows against the dollar as an easing of pessimism about Greece had traders paring bearish bets, Reuters reported.

The euro was on track for its biggest one-day gain in over a week as Greece proceeded to adopt tough measures required by its lenders to obtain cash and avert bankruptcy.

Sterling and the Emirati dirham also rose against the rial by 0.4% and 0.34% to 50,600 rials and 8,860 rials, respectively.

Apart from domestic supply and demand in Tehran, the dollar is expected to strengthen again in the coming weeks as traders anticipate the US Federal Reserve will raise interest rates by yearend. Fed Chair Janet Yellen and other Fed officials have said higher rates are appropriate later this year if the US economy continues to strengthen.

With no expectation of new developments about the JCPOA, the greenback’s renewed strength in the international currency trade could help the currency hold on to its recent gains and even lift it above the 33,000-rial level.