Trump's Iran decision: 3 scenarios and consequences for currencies and oil
|- Trump is set to announce his decision on the Iran deal on Tuesday at 18:00 GMT.
- This is the most important foreign policy move in 15 months, and the world is watching.
- There are three potential scenarios for his decision and the impact on oil and currency values.
US President Donald Trump will tell the world what he decides to do with the Joint Comprehensive Plan of Action (JCPOA) on Tuesday at 18:00 GMT (14:00 EST). Well before becoming President, Trump criticized the nuclear agreement that his predecessor Barrack Obama led. He called it "the worst deal ever" on several occasions. However, in his 15 months in office, Trump reluctantly renewed the waiver on US sanctions on Iran and kept the deal intact.
The decision comes a few days ahead of the May 12th deadline to renew the sanctions on Iran. Every six months, the US Administration examines Iran's compliance with the details of the deal and decides if to waive penalties on the Middle-Eastern country. For markets, the most significant sanctions are on Iran's exports of oil.
Oil prices have increased toward the decision after Trump increased his criticism and Israeli Prime Minister Binyamin Netanyahu presented documents that Iran lied about its nuclear intentions. The move by Netanyahu may have been coordinated with the Trump Administration. The Administration now consists of foreign policy hawks: Mike Pompeo as Secretary of State and John Bolton as the National Security Adviser.
All in all, markets expect Trump to scarp the deal and oil prices have risen accordingly. Nevertheless, this is more than a binary choice. Here are three scenarios.
1) Abandoning the deal and imposing sanctions
In this scenario, Trump announces that the US immediately quits the deal which includes Germany, France, the UK, Russia, and China. These countries and Iran would have to decide if to continue with the nuclear agreement or to let it go, something that could later have far-reaching consequences for the Middle East.
For markets, such a decision would deal the worst blow and would send oil prices even higher. Markets would not have enough time to adjust to the absence of Iranian oil from the markets. In this event, the safe-haven yen is expected to rise against all currencies. The US Dollar will likely gain against all the rest, apart from the yen, extending its current trend.
The Canadian Dollar will likely struggle: higher oil prices may not be enough to counter a more gloomy atmosphere in the markets.
This is the harshest decision, and it is not entirely priced in.
2) Staying in the deal but not waiving the sanctions
The non-binary option includes removing the waiver on sanctions, thus reimposing restrictions on Iran's oil exports, but with a 180-day notice while the US remains a reluctant signatory to the JCPOA. This would allow markets to adjust for the change and would also allow for further negotiations. It would deal a blow to the agreement but will not be a deadly one.
This scenario is more likely and is basically priced into the price of oil. The safe-haven Japanese yen could gain some ground, and the US Dollar could tick higher against commodity currencies. However, it would not change the fundamentals of currency or oil markets.
Later on, in the following 180 days, oil would move on what Saudi Arabia decides to do with its petrol output and markets will be much more attentive to the negotiations around the deal. Yet as mentioned, the immediate effect would be minimal. The scenario has the highest chances.
3) Status quo
Another waiver of sanctions and the US remaining in the deal currently seem unlikely given the recent rhetoric from Trump, his aides, and Netanyahu. Nevertheless, the President is unpredictable. He may decide to give peace another chance after French President Emmanuel Macron and others pleaded him to see the upside in the agreement.
The optimistic scenario for the markets would send the safe-haven yen down, and the US Dollar would struggle against the Australian and New Zealand Dollar. For the Canadian Dollar, it would be a double-edged sword. The loonie would like higher oil prices but also enjoys a more peaceful atmosphere.
All in all, the announcement by Trump will have an immediate effect on markets and probably also a longer-term effect.
More: Iran’s President Rouhani: Iran seeks constructive relations with the world
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