The Saudi Riyal Peg Is Safer Than Forward Contracts Imply
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The recent spike in U.S. dollar/Saudi riyal forward points has prompted speculation that Saudi Arabia may abandon the riyal peg to the U.S. dollar, but the country’s fundamentals and abundant reserves don’t justify such a move, writes Bloomberg strategist Mark Cudmore.
One-year USD/SAR forward points spiked over 3,000 percent in the five months leading up to a closing peak of 650 on November 24. And they are still trading at 475 now. While this move seems dramatic, it is important to note that 475 points is only equivalent to a 1.3 percent move in spot USD/SAR over the next 12 months. That means, the market is pricing in only a small chance of a devaluation after previously pricing in no chance.