Oil’s rebound to about $40 a barrel means some investors are nursing losses after betting that Saudi Arabia would abandon its three-decade-old currency peg.
Contracts used to speculate on the kingdom’s exchange rate in the next 12 months have fallen to about the lowest since November. A $1mn wager on the contracts at their peak in January would have lost 68,900 riyals ($18,370), or about 1.8%, according to Bloomberg calculations. Several US-based hedge funds were said in February to be among investors that have bet Saudi Arabia would devalue the riyal.
The decreased speculation that Gulf nations will abandon their dollar pegs underscores how crude prices have recovered this year. Oil, Saudi Arabia’s main source of revenue, is headed for a second straight monthly gain. The Saudi riyal has been trading at a rate of 3.75 per dollar since 1986, and the kingdom has taken steps to make speculating against the currency harder.
“We have argued that those positioning for a devaluation were going to be disappointed,” said Simon Williams, the London-based chief economist for central and Eastern Europe, the Middle East and North Africa at HSBC Holdings. “The pegs have been in place for 30 years in times of high oil prices and low oil prices. I have no sense” that recent losses in crude are “going to change policy makers’ minds or force their hand,” he said.
The percentage loss on the riyal forwards may actually be greater than 1.8% because derivatives trades tend to be leveraged, meaning that more is at stake than is actually wagered. Still, the cost of a bet on any devaluation is small relative to the windfall investors would stand to receive should it happen.
Twelve-month currency forward agreements have declined for other members of the Gulf Cooperation Council. Contracts for the UAE dirham have dropped 65% since hitting a seven-year high in January, while those for the Omani rial have almost halved from a recent peak. Bahraini dinar and Qatari riyal forwards have also tumbled.
Saudi Arabia has dipped into its reserves and sold debt as oil revenue dropped. Foreign-currency holdings have tumbled every month but one since August 2014 to less than $600bn in January, from about $737bn.
The reserves of GCC members provide ample room to maintain pegged exchange rates for several years, even in an adverse scenario for oil prices, Moody’s Investors Service senior analyst Mathias Angonin said in Dubai last week. Changes to the current exchange-rate systems are unlikely because the costs associated with one-off devaluations would outweigh the benefits, he said.
The Federal Reserve has also relieved the pressure on Gulf currencies’ dollar pegs.
The US central bank held off from raising interest rates this month and lowered forecasts for how much they’ll rise this year, citing the potential impact from weaker global growth and financial-market turmoil on the economy. That’s helped drive the dollar the lower, buoying commodity prices.
“When you have a scenario where the Fed has scaled back the pace of their tightening, a lot of the reasons for getting off the peg have gone,” Kiran Kowshik, a currency strategist at UniCredit Bank AG in London, said by phone. “If you had the Fed very hawkish and starting a succession of hikes, that would be a different story.”