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Sanctions on Iran causing more volatility for oil and global markets

Investors are busy playing catch up with several financial market headlines throughout the summer.

When the summer period is expected to be the time of the year where market volatility calms down.

This has not been the case for this summer, following recent data from Morgan Stanley analysts late in July highlighting that this year is already on track to be the most volatile year for the markets since the global financial crisis in 2008.

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The most recent headline to have reached investors early this week has been the stark threat from President Trump that not only will the Trump Administration intend to re-imposed sanctions against Iran, but those who fail to wind down their activities with Iran risk severe consequences.

When you consider that the UK, the EU (including France and Germany), Russia and China all stated in the immediate aftermath of Trump pulling out of the 2015 nuclear deal that they would maintain their commitment to the signed 2015 agreement.

This was seen as another warning for global market sentiment.

At a time where Trump is already threatening for a global trade war, this could decrease investor appetite towards risk.

Reduced investor appetite could add more pressure for stock markets, emerging market currencies and the general emerging market sentiment in the near-term.

Before mentioning the pain that the Iranian Rial has suffered in anticipation of re-imposed economic sanctions, there have been two currencies in particular that have noticeably suffered in recent months.

The Turkish Lira has been battered for a host of different reasons, although Turkey is also known for conducting trade with Iran.

It also has its own deteriorating relationship with the United States, with the Trump Administration only days ago threatening to impose its own economic sanctions on Turkey, the Lira is at risk to weaken even further.

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The Indian Rupee has been one of the most surprising losers in the period leading up to the reintroduction of sanctions, with the currency losing nearly 4% between April and July.

India is one of the largest importers of Iranian Oil, but the trading relationship between Iran and India goes beyond energy trade.

India is one of the economies that is seen at threat to headwinds from a weakening Iran economy.

The Iranian Rial itself has collapsed in anticipation of the return of economic sanctions.

The unofficial exchange rate of the Rial fell to a record low of 112,000 at the end of July, with the currency having lost more than half its value against the Dollar in the past four months.

There are severe concerns that Iran’s economy could collapse when US sanctions return, providing a miserable conclusion to a period where the economy has enjoyed nine consecutive quarters of annual GDP growth since the 2015 nuclear deal was signed.

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One of the major talking points when it comes to the re-imposed economic sanctions on Iran is what impact it could have on the price of Oil.

While the value of US Crude Oil has edged higher between 6 – 7 August, there is an air of skepticism over whether Iran sanctions will actually have a medium/longer-term impact on the price of Oil.

While it is true that Iran has ramped up its own production of Oil and this will likely decline once sanctions are implemented, there are concerns that other producers might increase their own production output to avoid the valuation of Oil edging significantly higher.

President Trump himself has been very outspoken on social media platforms that the price of Oil remains too high, and he has also indicated that he has agreed with Saudi Arabia that the Kingdom will increase its own production output.

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The truth is that no one really knows what impact the Iran sanctions will have on the value of Oil, and it will take some time after implementation to analyze whether it really has a material impact on the price of Oil.

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Written by Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM