Imminent: USDSAR devaluation cycle

Author: Tanya Rawat

I continue to track the tightly pegged USDSAR which used to hover around 3.7490-3.7510 range. Any deviation has been historically closely related to oil and/or dollar movement.


Case 1
Oil market developments have caused pressures historically, when in 1993 falling oil prices, combined with concerns about the budget and current account deficits, generated money market speculation that the Saudi Riyal would be devalued versus the US Dollar.

Case 2
Similar speculation occurred during late 1998 and early 1999 owing to a combination of falling oil prices and an economic crisis in Asia that caused major exchange rate devaluations in that region. At that time, SAMA (Saudi Arabian Monetary Agency) successfully intervened in the foreign exchange markets with its vast foreign asset position to maintain the stability of the riyal.

Case 3
In late 2007, SAR strengthened to 3.7365 on rumours then that the spike in oil prices (denominated in USD) would cause the SAMA to de-peg from the dollar as Kuwait and Syria did in May and June 2007 respectively as the dollar weakened against all currencies.

Case 4
Recently, similar to Case 1 when Saudi Arabia made the statement of being comfortable at lower oil prices, this triggered some activity in the Spot and Forward market with the SAR weakening as people were hedging/speculating against a weaker Riyal versus the Dollar.

Currently, with the demise of the King Abdullah, while Saudi Arabia 5 year Credit Default Swaps remain unchanged relative to itself, the currency market is experiencing volatility. The Saudi Riyal (SAR) is weakening to historical levels versus the United States Dollar (USD). It has happened twice historically, in 1993 (when in 1993 falling oil prices, combined with concerns about the budget and current account deficits, generated speculation that the SAR would be devalued versus USD) and recently in 2008-09.

Bid/Ask at time of writing is 3.7570/3.7578.
Most providers now have forward points at 70-100 points move in 1 year.

The forward curve as follows using 90 points:
Outright  = Spot + Forward Points = 3.7574 + 0.009 = 3.7664

USDSAR Spot Chart

Points 23-01-2015

Outright 23-01-2015

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© Bloomberg

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