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Fading Iran’s Central Bank: Euro, Gold & US Dollars at Trader’s Narrative





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As most central banks, the Iranian central bank may have a few dozen economic PhD’s on staff but they don’t seem to have anyone who knows anything about the currency markets or trading. They are about to compound an earlier mistake by switching their foreign currency reserves from Euros to gold and US Dollars.

According to Jaam-e-Jam, a state controlled newspaper (is there any other kind in Iran?) the Iranian central bank has started to sell 45 billion Euros from its reserves and will continue to do so in tranches of 15 billion until the rebalancing is completed in September. It will shift their current reserve holdings from 55% in Euros to 20-25%.

You may recall that these were the same braniacs in early 2008 who decided to end oil transactions in US dollars and instead used primarily Euros (with some Yen thrown in for good measure). That just happened to be the low for the US dollar index and the high for the Euro.

At the time public sentiment for the US dollar was extremely low. Ahmadinejad even referred to the US dollar as “worthless pieces of paper”. This politically motivated decision, thinly veiled as economic policy, was even promoted by Iran in OPEC. They lobbied other OPEC member states to move away from pricing oil in US dollars and instead use a basket of currencies, weighted heavily towards the Euro.

Everybody at the table, except Venezuela, pretended to have received an urgent call from their chauffeur. Which reminds me, Chavez’ “Bolivar revolution” is on track to completely destroy that countries economy at this pace. By the time he’s done - I’d say in a few years - globe trotting contrarians will be able to pick up some very cheap equity from Venezuela. And some beautiful beachfront property as well as.

But I digress. Now Iran is putting the cherry on top of this trade by gunning it into reverse. Not being satisfied with picking the low in the US dollar and the high in the Euro (in early 2008), they now want to pick the top in both the US dollar and gold and the low in Euros - currently the most oversold major currency.

According to the Iranian newspaper, “Central bank foreign currency experts … believe that this economic crisis in Europe is getting worse and will lead to a further fall in the value of the euro and will increase the value of the dollar.” Really? You don’t say.

When things get so bad that central banks are spooked and they are so spooked that they put aside ideology to protect themselves from what they see as a worsening crisis, then we have the makings of a contrarian inflection point. Of course, it also helps that we have corroborating evidence from a number of sources, including the DSI. But it is satisfying to see such anecdotal evidence nonetheless.

A chart of the Euro and the corresponding Daily Sentiment Index from Gold Sentiment Cross Currents:

euro index chart DSI readings May 2010

A chart of the US Dollar and its corresponding Daily Sentiment Index from “Anything But Euros” Pushes US Dollar Sentiment to Extreme:

US dollar DSI sentiment Jun 2010

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5 Responses to “Fading Iran’s Central Bank: Euro, Gold & US Dollars”  

  1. 1 Steve Howe

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    What about the H & S targeting to sub parity?

  2. 2 RMD

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    Awesome analysis! Spot on

  3. 3 Steffen

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    And again confirmation from the german magazine cover indicator:

    http://p3.focus.de/img/gen/l/E/HBlEXsT9_Pxgen_r_Ax480.jpg

    Translation: “More safety & higher interest rates: Get out of the EURO! Bonds in Swiss Franc, Norwegian Krona, Australian Dollar.”

    Some anecdotal experience: Here in Germany, banks and currency exchange services are facing exceptionally high demand for foreign bank notes in the last weeks, notably Swiss Franc and Norwegian Krona. Obviously the economically inexperienced are changing their euros in currencies they view as ’safe’.

  4. 4 Andrew

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    I understand the CBI’s motive for putting their money into gold but why would they even think about touch the U.S. dollar? I mean yes fiat currency is worthless but the U.S. dollar is just toxic. Were they brainwashed into putting their money into a flawed currency?

    Or maybe it’s like the “who’s hated more, BP or Goldman Sachs” thing. They had to choose which one is worse: the dollar or the euro?

  5. 5 PEJ

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    Babak, this is one of my favorite posts ever. Love your style and of course, agree 200% with your analysis.

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