The United States’ pullout of the ‘defective’ Iran nuclear deal has thrown markets globally into turmoil as stocks, currencies, and commodities recorded fluctuations in prices Wednesday.
However, the Nigerian local currency, the naira, remained steady amid the worldwide negative sentiments. The naira specifically held its ground supported by appreciating oil prices Wednesday following Trump’s decision despite the dollar index rallying to a fresh 2018 high.
With the dollar heavily supported by expectations of higher U.S interest rates and risk aversion souring appetite for riskier assets, emerging market currencies such as the naira were expected feel the heat, but the naira resisted.
Though the naira eased to N362 to the dollar for investors on Tuesday as funds repatriate dividends abroad following the end of the earnings season and as forward currency contracts mature amid tight dollar liquidity, it remained steady at the parallel markets at N362/$, traders said.
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U.S stocks ended mixed on the news while oil prices fluctuated in each direction, as investors considered the potential negative ramifications of Trump’s decision. The U.S President adopted a very aggressive rhetoric during the announcement and failed to hold back from his view that the 2015 agreement was “defective” at its core.
“While it was widely anticipated that Trump would pull out of the Iran agreement, what is likely to leave a lasting impact on the markets is the threat that he would also penalize those who help Iran,” Lukman Otunuga, research analyst at FXTM noted, adding that the overall risks are encouraging traders to price in some new geopolitical risk premium, and his threat can potentially be seen as a blow for U.S allies.
“There is a threat of Trump’s stark tone questioning U.S relations with its European allies, especially given that the likes of France and the United Kingdom had appealed for Trump not to withdraw,” he pointed out, noting that both China and Russia were part of the 2015 Iran nuclear agreement, a development that could further strain U.S. relations with both countries.
“What this all likely means to the financial markets is that anxiety could be heightened over a new round of geopolitical tensions. This will not have been helped by Iran immediately stating that it was preparing to restart uranium enrichment, which is key for making nuclear weapons,” Otunuga said in a note to business a.m.
He said the prospect of heightened geopolitical tensions in the Middle East following Trump’s departure from the nuclear deal is seen as encouragement for risk aversion.
“A risk-off environment is likely to attract the flight to safety mindset from traders, where both Gold and the Japanese Yen would be seen as potential beneficiaries.”
However, the main event risk for the Nigerian economy this week will be the inflation figures that are scheduled for release on Friday. Any signs of inflationary pressures cooling could support expectations that the CBN will announce an interest rate cut this year.