As of January 20, 2014 an agreement between Iran and six world powers will take effect. This is the negotiated solution to allow sanctions on Iran to be eased while Iran backs off its path to production of weapons grade nuclear fuel. Iran has been negotiating with a group containing the USA, Great Britain, France, Germany, Russia and China. Progress started when Iran elected a new president. This agreement is a first step and once the initial agreement is in place Iran and the six world powers will begin negotiation for a comprehensive settlement. The goal of world powers is to be assured that Iran is not enriching uranium as part of a plan to create nuclear weapons. It will necessary for Iran to open its testing and enrichment programs to United Nations inspectors for a long term comprehensive settlement to be achieved. In the meantime many are hopeful that progress so far is an indication of progress to come. Meanwhile currency traders are interested in what will be the Forex response to the Iran nuclear deal as events unfold.
Trust and Trade with Persia
We wrote about the Forex response to the falling Iranian rial. This happened because of the severe sanctions put on Iran by Western powers. If the deal works Iran will open up its nuclear program and back away from a race toward nuclear weapons. Or it may well be that when inspectors are given full access they will find that Iran was in fact only planning to produce electricity and medicines with its program. In either case when trust returns so will trade. Iran is a major oil and gas producer and currently is not able to sell all of what it produces. A stronger economy as a result of fewer or no sanctions will obviously strengthen the Iranian currency. In addition when the threat of armed conflict subsides it will be a positive for all concerned in the area and in the world.
Forex and Economics
Not all of Iran’s economic problems will be solved by the lifting of sanctions in return for proof that they are not pursuing nuclear ambitions. The state sector of Iran’s economy is inefficient which produces economic distortions. Iran is a major oil and gas producer and heavily subsidizes these products at home. The government has relied on price controls, subsidies, and other rigid policies which tend to slow down the economy reducing private sector potential. There is a large black market and lots of corruption, as private businesses is mostly limited to workshops, small farms, minimal manufacturing, and a small service sector. The initial Forex response to a Iran nuclear deal will likely be positive but over the run Iran needs to adopt a more market driven economy for the effect to last.
The strict religious approach taken by the ayatollahs that run the country provides a poor incentive for smart and inventive young people to stay in Iran. Thus the country suffers a substantial brain drain as talented and energetic people seek work and lives elsewhere. Despite the fact that workers are going elsewhere in search of jobs Iran suffers from double digit unemployment. That will perhaps get better and improve the Forex response to the Iran nuclear deal. Iran’s major trading partners are China, India, Turkey, South Korea, and Japan. They account for nearly sixty percent of trade. This list may become wider and deeper if trust can be reestablished between Iran and major Western powers. In the meantime anyone needing to trade with Iran will be wise to use Forex options to hedge currency risk as the Forex response to the Iran nuclear deal plays out. And for those who liked our article about automatic Forex system trading the Forex response to the Iran nuclear deal does not lend itself to automatic trading profits!