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FX Investors, Beware Of The Return Of Petrodollar Recycling – Credit Agricole

Petrodollar recycling back under FX investor microscopes. Following last week’s Iran agreement to remove supply restrictions, production expectations are weighing upon the market. With the Islamic republic expected to add between 1.8 and 2.4 million barrels per day next year – up from 1.6 million bpd in 2014 – such pressures are to be expected. Less understood however will be the resulting Petrodollar recycling influences felt upon the FX market.

According to OPEC their member countries hold 66.0% of proven global reserves with Iran comprising a significant 13.1% of that amount. Therefore as capacity comes back online and the Petrodollar revenues increase, it is reasonable to expect a similar increase in FX diversification activity.

With the OPEC Annual Bulletin registering earnings of USD53.6bn from Iran’s Petroleum exports, USD-recycling could prove an important source of non-USD currency support (eg. EUR) in coming months.

One should not forget, however, that lower commodity prices also lead to slower reserve accumulation. According to IIF Iran has one of the highest breakeven prices among oil exporters meaning that if current oil prices were to prevail chances are that they will continue to use any oil revenues to fund their fiscal deficits. That should diminish any diversification impact, at least initially.

Accordingly we remain of the view that the USD will stay mainly driven by rate expectations, which should make a case of the currency appreciating further.

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