On November 8th, The International Atomic Energy Agency (IAEA) is due to publish an updated report about Iran’s nuclear program. It is expected to provide new and worrying details about Iran’s nuclear capabilities. Towards this event, news about an upcoming Israeli attack on Iran have emerged.
The chances of an airstrike happening are low. 5 reasons are detailed below. But if tensions rise, how will this impact currencies?
Why there's a low chance of a strike:
- Israeli threats add to pressure on sanctions: The Western countries will want to increase sanctions on Iran, while Russia and China are reluctant to do so. Raising the threat to attack puts pressure for more sanctions and helps the U.S. and its allies.
- Israeli government under internal pressure: The J14 social justice movement continues to be very active. The government led by Netanyahu managed to divert attention from the recent protest on October 29th through a mini-escalation in Gaza. Keeping Iran in the headlines also helps move public attention to external enemies and diverts attention from internal economic issues. Also the release of abducted soldier Gilad Shalit has a lot to do with this internal pressure. But will the government go ahead with a strike? Probably not – polls show that only half of the population supports an attack, and that most Israelis are convinced it will trigger a full scale conflict. So it’s better to keep the media busy with threats, but to avoid acting.
- No U.S. Approval for an Israeli strike: It is hard to believe that Israel will act on its own in attacking Iran. In the past, a different U.S. administration gave Israel a clear red light regarding such an attack. The U.S. may express concern about Israel doing it on its own, but it also goes to show that there is no U.S. approval. In addition, it is uncertain if a full scale destruction of the Iranian nuclear plants can happen without military assistance from the U.S.
- The U.S. doesn’t need another war: The U.S. economy is still in dire straits, despite some encouraging signs seen lately. Obama just announced a retreat from Iraq. Allocating resources to the same region once again will strain the U.S. budget, just as the super committee is trying to find ways to reduce the deficit, and isn’t having a lot of success. Another war, even if the U.S. participation is limited, will put a lot of pressure on U.S. finances one year before the elections, and when the U.S. is finally showing some signs of recovery.
- Iran also prefers to focus on external enemies: The Arab spring has also reached the Islamic Republic. Protests were crushed in Teheran a few months ago. But now there are tensions within the ruling elite that have been surfacing. Keeping tension high with the U.S. and Israel means less awareness of internal issues. Iran certainly want tension and it recently said that it will cause “1 million Israeli casualties with only 4 missiles”. But a full escalation isn’t desired in Teheran either.
In case tensions continue to mount and, of course, in case all these assumptions collapse and a strike is carried out, most winners and losers can be clearly marked:
- The U.S. dollar and Japanese yen will jump as safe haven currencies: they are the clear safe havens at the moment.
- Euro, pound, Aussie, kiwi to crash: these are the clear risk currencies at the moment. The mess in Greece and now in Italy already weighs heavily on the euro and has a strong impact on the others.
- The Canadian dollar will drop: While Canada exports oil which will clearly rise in case of a Middle Eastern conflict, the Canadian dollar tends to behave more like a risk currency.
- The Swiss franc will swing: uncertainty is lower regarding the franc: on one hand, it has moved to the camp of risk currencies since the huge SNB intervention. But on the other hand, it could switch back to the “safe haven” camp in case of a conflict in the Middle East. This is what happened when the Libyan civil war broke out.
What do you think can happen?