Job Discussion Forums

[hash]

Saudi Arabia Dollar Peg to Stay Amid Market `Misperception'

http://www.bloomberg.com/news/articles/2016-01-11/saudi-arabia-reiterates-keeping-riyal-s-peg-to-u-s-dollar

by Arif Sharif - Vivian Nereim
January 11, 2016 — 11:00 AM AST Updated on January 11, 2016 — 3:19 PM AST

Central bank governor makes second pledge in four months
Says market is `mispricing' riyal forwards versus dollar

Saudi Arabia pledged for the second time in four months to stick with its 30-year-old currency peg after a key indicator showed bets for a devaluation at the highest in almost two decades.

The Saudi Arabian Monetary Agency will “uphold its mandate" of maintaining the riyal at 3.7500 per dollar, backed up by a range of monetary-policy instruments including its foreign-exchange reserves, central bank Governor Fahad Al-Mubarak said in statement on the regulator’s website. Twelve-month forward contracts for the riyal climbed to the highest since at least December 1996 on Friday, reflecting growing speculation the country may adjust its exchange rate.

“Speculation has continued to gather pace with oil prices moving down" about the riyal, said Monica Malik, the chief economist at Abu Dhabi Commercial Bank PJSC, the United Arab Emirates’ fourth-biggest lender. This statement “is to provide a consistent message in support of the peg,” she said.

Saudi Arabia’s budget has been under pressure after crude, the nation’s main source of income, plunged to the lowest level in 12 years. The kingdom has announced plans to cut expenditure and subsidies to cope with the decline and may tap local and international debt markets this year to fund a deficit.

Forwards ‘Volatility’

The currency peg is no longer sustainable, Peter Kinsella, an analyst at Commerzbank AG in London, said in a report last week. Pressure on the forwards will probably increase over the “coming weeks and months,” he said.

The kingdom’s net foreign assets dropped for 10 straight months through November, the longest streak since at least 2006, to $627 billion. Al-Mubarak said in September the nation will stick with its dollar peg as long as oil underpins the economy.

“Of late we have observed volatility in the dollar versus riyal forward market due to the mispricing linked to market operators’ misperception about Saudi Arabia’s overall economic backdrop,” Al-Mubarak said in the statement on Monday.

Twelve-month forward contracts rose to 975 points on Friday, the highest since Bloomberg started collecting the data. They were at 850 points at 3:04 p.m. in Riyadh Monday.

[plumpy nut]

Oil just plunged further down today at around 31. With the Chinese economy also plunging, oil production is no longer the issue in determining oil availability. The Chinese economy is expected to decline throughout 2016. Maybe the Saudis will be able to keep the current exchange rate, maybe not.