Iranian forex traders sit on hard currencies as rial sinks to new low

Iranian forex traders sit on hard currencies as rial sinks to new low
What's up with the rial? The depreciation of the currency has become a big topic in Tehran of late.
By bne IntelliNews January 23, 2018

With the Iranian rial (IRR) having hit a new low against a basket of hard currencies in the past week, the Central Bank of Iran’s (CBI’s) governor, Valiollah Seif, on January 22 issued a warning to speculators betting against the currency that they will ultimately lose.

As trading started on January 23 on Tehran’s Ferdowsi street, the US dollar was offered at above IRR47,500. However, most traders refused to buy or sell, instead continuing to sit on what valuable foreign currencies they had. Meanwhile, the pound sterling and the euro reached record highs of IRR67,500 and IRR57,950 against the rial, respectively.

CBI chief Seif told Tasnim news agency that taking a position against the rial would turn out to be a loser's game as he has the authority to pump as much foreign currency into the free market system as he feels is necessary at any point. He added that the rial was likely to rebound in the next few months.

“Those who are investing their resources in foreign exchange will suffer losses in the end,” Seif said, adding that rising oil prices were giving Iran more resources to support its currency.

“Since the price of oil has reached $70 a barrel, there is no reason to see long-term fluctuations in the foreign exchange rates,” Seif noted.

The sudden drop in the value of the rial—so far since January 1, it has lost more than 30% of its value against the dollar—has left market watchers confused. No particular political or economic factor should presently be dragging on the currency to this extent, they contend. It has undoubtedly been pulled down in part by the precarious situation with the nuclear deal, with Donald Trump, who has demanded changes to the accord, warning that the clock is ticking on its survival. If the agreement, which relieves Iran of crippling economic sanctions, was in full swing the World Bank might be expected to forecast more than the 4.0% economic growth in 2018 for Iran that it anticipated in an early January economic update.

However, the impact of the Trump threat to the nuclear deal cannot explain all of the rial’s current decline, say currency traders. They are thus pondering rumours that suggest the depreciation is part of a broader, heavier than expected push by the CBI to bring the currency to a much lower rate in order to boost the competitiveness of Iranian exports and counter-balance high inflation.

Iran has a long history of propping up the rial and limiting the amount of foreign currency available on the official market, but in recent years the CBI has said it intends to close the gap between the free market and official exchange rates. Analysts, nevertheless, are at a loss as to what the national lender’s actual plan and timeframe may be for this matter.

One trader who spoke with bne IntelliNews, who asked for his name to be withheld, said: “Honestly, I cannot place where this is coming from… maybe it is something to do with the Supreme Leader [Ali Khamenei] telling the Islamic Revolutionary Guard Corps to sell their non-essential assets.”

A CEO who spoke with this publication said that in his eyes the wider move to realign the rial formed part of a plan to adjust the currency “to a new normal” and boost local output.

“It’s all about ‘complex systems’. For example, the government plans to lower the rial to compensate for the current budget deficit through currency manipulation.” He added: “You also need to understand that it is part a broader problem of an unstable economy topped with capital withdrawal from major banks.”

Nowruz cash hoarding
Another often stated reason for the extent of the sudden devaluation is that it is part of a broader seasonal trend of Iranians hedging on future demand to purchase goods for the Persian new year holiday period, which takes in some weeks running up to the first day of the Iranian New Year (Nowruz) on March 21. The two-week annual holiday and government shutdown are when Iranians often buy hard currency before they travel abroad. Blaming the 2018 run on the rial is difficult though when you consider it has come at least two months too early to be clearly attributed to Nowruz and when you take in the intensity of the depreciation.

The jump in foreign currency exchange rates is likely to force many middle-class Iranians to reconsider their travel plans for popular destinations like Turkey, Georgia and the United Arab Emirates, as such trips are becoming increasingly unaffordable.

Tasnim news agency also reported that the sudden rise in the dollar has had an immediate knock-on effect on the price of imported household goods. In just a week, they have grown 5-10% more expensive.

Foreign companies like LG and Samsung, popular on the local market, have reportedly seen their prices increase the most, but some retailers have been hesitant to put up prices, instead offering discounts to keep customers buying. One retailer said that in the run-up to the Persian New Year appliance wholesalers, for instance, bulk-buy their products months in advance in the expectation of bumper new year sales. The question is whether they will now prove able to turn a profit on the fiercely competitive market leading up to Nowruz.  

Gold sovereign havens

Gold sovereigns are a favourite asset for hoarding during times of crisis in Iran. The central bank-issued Azadi 18 karat sovereign coin currently trades at IRR14.8mn (€255), up more than 50% week on week following bumper trading.

The Azadi and its sister coin, the Imami, both remained stable on the market on January 23, with traders expecting the CBI to pump foreign currency into the free market to quell buying and selling frenzies. Traders are looking to shore up their gold havens until the forex market properly calms down.

Iran currently holds more than $132bn in foreign cash reserves and $600mn in gold, local media reported on January 23. With ample reserves of foreign currency in the CBI’s vault, it should imply that people have nothing to worry about in terms of the rial’s stability. Indeed, data in the Central Intelligence Agency’s (CIA) December 2017 factbook edition can be said to back up that point. Iran has higher currency reserves than more than 156 other countries around the world including Norway, Australia and Turkey.

Parliament getting anxious
Following the weeks of street unrest in Iran's poorer provincial constituencies, with food prices said to have been a particular trigger for the demonstrations seen nationwide, parliamentarians are worried that the rial’s loss of value against hard currencies could spark yet another round of trouble. If the rial weakens too far it might translate into inflation that could cause more of the type of discontent among ordinary Iranians that led to the protests, amid which 25 people died.

On January 21, the Majlis (Parliamentary) Economic Commission’s chair, Mohammad Reza Pour-Ebrahimi, formally urged President Hassan Rouhani to enact measures to calm down the markets.