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Riyal peg speculators suffer heavy losses

|By Arabian Post Staff| Hedge funds which bet on Saudi riyal’s dollar peg are reported to have lost heavily as the price rebound in the oil has apparently removed all immediate possibilities of Saudi Arabia abandoning the currency’s peg with the dollar. Several US hedge funds are understood to be among the losers.

According to Bloomberg, contracts used to speculate on the kingdom’s exchange rate in the next 12 months have fallen to about the lowest since November. A $1 million wager on the contracts at their peak in January would have lost 68,900 riyals ($18,370), or about 1.8 percent, according to Bloomberg calculations.

“We have argued that those positioning for a devaluation were going to be disappointed,” Bloomberg quoted Simon Williams, the London-based chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings, as saying. “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.

According to Bloomberg, the percentage loss on the riyal forwards may actually be greater than 1.8 percent 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 United Arab Emirates’ dirham have dropped 65 percent 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 $600 billion in January, from about $737 billion.

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 when it 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 lower, buoying commodity prices.