In this article, we’ll explore the market consequences of the US pulling out of the Iran Deal.
After you’ve read it, you’ll know how the move will affect oil prices and commodity currencies. With this knowledge, you’ll be able to place better Forex trades.
Specifically, here’s what the article covers:
- What the Iran Deal is – and why the US pulled out
- How US actions will see oil prices will increase
- Why higher oil prices will affect CAD
What Is the Iran Deal?
The ‘Iran Deal’ is agreement between the world’s major countries and Iran. According to the UK government, the deal prevents Iran from developing a nuclear weapon.
In 2015, the United States, United Kingdom, France, Germany. China an Russia worked together to broker an agreement.
It’s officially called the Joint Comprehensive Plan of Action.
However, the US pulled out of the deal this week. President Trump questioned its effectiveness in a public announcement.
What Does The Iran Deal Actually Do?
Under the agreement, Iran has agreed to inspections of its nuclear facilities. Also, Iran agreed to reduce its stockpile of uranium for 15 years.
Moreover, inspectors monitor nuclear capabilities to ensure Iran does not pursue a nuclear weapons programme. Currently, the International Atomic Energy Agency (IAEA) says Iran is meeting its obligations.
Here’s what Iran has done so far:
Eliminated 98% of its uranium stockpile.
Removed and destroyed the core from its Arak reactor, blocking the production of weapons-grade plutonium.
Ripped out over 13,000 centrifuges (two-thirds of total). Those removed in the process must be placed under continuous IAEA monitoring.
Halted all uranium enrichment activities at the underground Fordow site.
Allowed the IAEA to implement the safeguards necessary to monitor Iran’s nuclear program and implemented transparency measures, such as the Additional Protocol, to permit greater access to inspectors.
Gave the IAEA the information it needed to assess the possible military dimensions of Iran’s nuclear past.
In return, the international community agreed to lift crippling economic sanctions.
Likewise, former US President Barack Obama states that Iran has ‘eliminated 97 percent of its stockpile of enriched uranium’.
Why The US Pulled Out
Traders should try to understand President Trump’s reasoning. Being familiar with his foreign policy is useful when trying to judge future market reactions.
So, why did President Trump describe the Iran Deal as ‘decaying and rotten’?
Primarily, he believes the terms negotiated with Iran aren’t strict enough. Furthermore, the US government worries that Iran could still develop nuclear weapon capabilities.
The Iran Deal is defective at its core. If we do nothing, we know what will happen. In just a short time, the world’s leading state sponsor of terror will be on the cusp of acquiring the world’s most dangerous weapons…. pic.twitter.com/58qwBLzxIH
— Donald J. Trump (@realDonaldTrump) May 8, 2018
This is a view US allies publicly dispute. They want the Iran Deal to remain in place, even without the US.
Aggressive Foreign Policy
Despite criticism, President Trump’s aggressive foreign policy style is unlikely to change.
In fact, we’ve seen his approach produce incredible results in regards to North Korea. Since tweeting ultimatums to Kim Jong Un, we’ve seen North Korea deescalate tensions.
Plus, a historic meeting between President Trump and Kim Jong Un is set to take place on June 12th. This is remarkable, considering no US President has ever met a North Korean leader.
Why Oil Prices Will Increase
Why does the Iran Deal matter to Forex traders? The answer is simple: oil prices.
The US withdrawing from the agreement will see oil prices increase. Subsequently, this will affect commodity currencies. Before we explore that dynamic, let’s look at why oil prices will increase.
Since the Iran Deal, there have been no economic sanctions on Iranian oil exports. Therefore, now the US has left the agreement and imposed new economic sanctions on Iran, the supply of Iranian oil will fall.
Consequently, a decreased global supply of oil means higher prices. There’s already evidence of this since Trump’s announcement.
As reported by Reuters, oil prices jumped approximately 3% after the US pulled out the Iran Deal. Specifically, there was a 3.2% increase in Brent crude futures to $77.21 a barrel. Also, there was a 3% gain in WTI crude future to $71.14 a barrel.
Implications For The Canadian Dollar
The Canadian Dollar is known as a commodity currency. In other words, the currency is closely tied with oil prices.
So when oil prices go up, there’s a good chance CAD will follow. The opposite is also true – should oil prices fall, CAD will likely do the same.
This dynamic exists because the Canadian economy is reliant oil exports. In fact, Canada has the third largest crude oil reserves in the world, only behind Saudi Arabia and Venezuela.
As documented by Pound Sterling Live, the Canadian Dollar rose in value following President Trump’s announcement.
Don’t Follow Oil Prices Blindly
Good Forex traders understand that multiple fundamental factors can affect a currency’s price. This is true for the Canadian Dollar too.
While a decrease in global oil supply will push oil prices higher, CAD is facing downward pressure from other sources.
One such source is the ongoing NAFTA trade negotiations. As reported by The Financial Times, President Trump is threatening to abandon the trade deal between North American countries, including Canada. This threat is making investors worry about how this would affect the Canadian economy.
Going forward, ensure you balance conflicting fundamental factors before placing long-term trends. For further guidance on how to do this, you should read this article.
The ‘Must Know’ Market Consequences Of The Iran Deal
In this article, we’ve explored the market consequences of the US pulling out of the Iran Deal.
Particularly, we’ve explored why oil prices will increase and how that might affect the Canadian Dollar. Furthermore, we’ve described how the Canadian Dollar is positively correlated with the price of oil.
In addition, we’ve outlined why Forex traders shouldn’t follow oil prices blindly. Good traders take other fundamental factors into account when making a trading decision.
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