The Arab Spring was one of the main news themes of 2011. The ousting of the regime in Tunisia triggered moves around the Arab world. Egypt’s Mubarak was overthrown in a matter of weeks.
Uprisings began in Libya and ended successfully after a bloody civil war. The tensions there (and also in other countries) pushed oil prices higher. This weighed on the US dollar.
This analysis originally appeared in the Forex Outlook for Q1 2012. You can download the full report for free by joining the mailing list in the form below.
Bahrain saw huge protests. Only external and intensive military intervention by Saudi Arabia brought down the demonstrations. Even Saudi Arabia witnessed a “Day of Rage” which was silenced.
Blood still fills the streets of Syrian cities since spring. A full scale civil war is feared.
Protests were also silenced in Iran. But this isn’t the main issue in the Islamic Republic. According to a UN report, Iran continued pursuing nuclear weapons, and this raised fears in Israel and in the West.
In Israel, demonstrations for social justice rocked the streets during the summer. Protesters were inspired by the Arab Spring and by European demonstrations.
Summer is over.
The Israeli government has an interest to divert public attention from social justice to an external enemy. Iran, facing elections for parliament, also wishes to avoid domestic protest on rising prices and the harsh regime to outside enemies.
Apart from the UN report on Iran’s nuclear weapons, there have been other escalations: Iran captured a sophisticated US drone on a spy mission, announced it achieved higher nuclear capabilities and tested missiles.
For the US, an Iranian bomb is bad, but closing the Straits of Hormuz could be worse. A significant part of global oil flows through this narrow water channel. Iran has threatened to close it and warned the US of leading an aircraft carrier through the straits.
A full scale confrontation between the West and Iran is unlikely, but there are quite a few scenarios to be aware of:
- Proxy war: The situation in Syria has an impact on Lebanon’s Hezbollah, which gets arms through Syria. When Hezbollah is under pressure, it could divert attention to Israel. That’s one of the things that triggered the war in 2006. Also Syria might be involved this time, with Iran’s backing. Such a confrontation will push oil prices higher, help the yen and weaken the dollar but the impact will not be huge.
- Standoff at Hormuz: The threats could become real with no oil flowing in this critical region. This will send oil prices way higher, and will also hurt Europe, which is more dependent on oil from that region. It will also hurt Iran. In this scenario, risk aversion trade can be triggered to support the US dollar and counter the rise in oil prices. Risk currencies such as the Aussie and Kiwi could rise, while oil producing Canada could see its loonie balanced between risk aversive trading and higher oil prices.
- Full Scale War in the Middle East: If Israel proceeds with attacking Iran, the whole region could be set ablaze. Despite higher oil prices, the level of risk aversion will see the dollar, yen and also the Swissie (in a comeback) rise as safe haven currencies while all the others, including the Canadian dollar, fall.