Yuan Shock Sends Saudi Riyal Devaluation Wagers to Six-Year High

Updated on
  • Government foreign assets sliding amid oil price rout
  • One-year forwards climb most in more than four years

A key currency indicator in Saudi Arabia rose to the highest level since 2008, signaling some traders are increasing bets that the riyal will weaken after being fixed to the dollar for almost 30 years.

While few expect the biggest Arab economy to abandon its peg, a backdrop of falling oil prices, declining government reserves and a devaluation in China has prompted speculation Saudi Arabia could be reconsidering the level of its exchange rate. One-year forward contracts for the riyal had the largest single-day surge since 2011 on Wednesday, after China devalued the yuan for a second day.

The jump underscores concern that oil’s 52 percent decline in the past 12 months will make it harder for the world’s largest crude exporter to sustain its exchange-rate regime as reserves drop for a fifth consecutive month and the government faces its second annual deficit. Any slowdown in Chinese demand for commodities threatens to hinder Saudi Arabia’s exports to the country, its largest trading partner.

“The fall in oil prices combined with the recent devaluation of the yuan are leading to speculation that a devaluation of the Saudi riyal is on the cards,” Farouk Soussa, the London-based chief Middle East economist at Citigroup Inc., said by e-mail on Wednesday. That’s “a view that we do not share,” he said.

The head of public relations at the Saudi Arabian Monetary Authority didn’t respond to calls or an e-mail seeking comment on Wednesday.

An increase in riyal forwards accelerated on Aug. 6 after the country’s central bank announced a 1.2 percent decline in foreign assets in June to $664.4 billion. While they have dropped $72.6 billion since a record in August last year, they remain the third-biggest globally.

To support public finances, Saudi Arabia this year sold its first bonds since 2007, including 20 billion riyals($5.3 billion) on Monday. The government plans to raise about 90 billion to 100 billion riyals by the end of the year, two people familiar with the matter said this month.

The riyal is pegged at 3.75 to the dollar. One-year forward points for the currency declined 57 points to 175 at 2:57 p.m. in Riyadh, according to data compiled by Bloomberg.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.