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A Rare Occurrence In The Saudi Currency Market Tells You That Trouble Is Brewing In The Middle East

Oct. 4, 2012 1:59pm Guest Post

This post by Matthew Boesler originally appeared on Business Insider.

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An important shift is developing in Saudi Arabian currency derivatives markets as Iran becomes engulfed in populist protests amid hyperinflationary pressures and armed conflict breaks out between Turkey and Syria,heightening concerns about tensions in the Middle East.

The 12-month forward rate on the Saudi Arabian riyal – or the difference between how many riyals traders think a dollar will be able to buy a year from now and how many riyals a dollar can buy today – has been hovering just above zero for the past two weeks.

In other words, as pointed out by BNP’s Bartosz Pawlowski, traders are expecting the riyal to depreciate against the dollar. Or to think about it another way, people are betting that in a year, people expect that the dollar will be able to buy more riyals than that dollar is able to buy right now.

And that is something that almost never happens – unless markets are getting really worried about Saudi Arabia, one of the most stable countries in the region.

Here is a chart that shows the latest move above the zero level (that tiny blip at the far right) and also puts into perspective how rare of an occurrence it is for the rate to do so:

(Bloomberg, Business Insider)

The reason the SAR 12m forward rate is usually way below zero, as most of the chart shows, is because Saudi Arabia runs a massive trade surplus due to its central role as oil exporter in the global economy. In other words, one would usually always expect the riyal to appreciate against the dollar.

But Saudi Arabia’s currency is pegged to that of the U.S. – at a rate of 3.75 riyals per dollar.

Because the exchange rate is fixed, the value of the riyal isn’t such a great way to read the market’s views on Saudi Arabia, because the Saudi Arabian Monetary Agency stands ready to support the peg at the 3.75 level on a daily basis.

The currency forwards market, on the other hand, gives some insight into market views that, on account of the peg, can’t be gleaned from the price of the currency.

Credit Suisse strategists explained the importance of the 12-month forward rate on the Saudi riyal as an indicator of stress in the region in an early 2011 note to clients – the last time everyone was concerned about Saudi Arabia, when popular uprisings were sweeping across the Middle East.

In early 2011, they wrote:

Given the importance of Saudi Arabia to global oil output, we look specifically at the level of the SAR 12m forward in Exhibit 8. Since the recent unrest began, the market has priced out the possibility of an appreciation of the currency over the next year. Given the currency peg, a significant move upward in the forwards would portend greater risks to the oil supply and foreshadow further rallies in US rates.

As the accompanying chart shows, traders in the forwards market were seriously concerned about a riyal devaluation against the dollar back then, as the SAR 12m forward inched above zero:

(Credit Suisse)

And look what happened right after, when the spectre of populist protests and Shia/Sunni conflict in neighboring Bahrain spilling over into Saudi Arabia made the SAR 12m forward rate go wild:

The SAR 12m forward rate has moved against zero once again in recent weeks. (Business Insider)

That doesn’t necessarily mean traders are going to start pricing in a big devaluation of the riyal just yet – the chart at the top shows that the rate has briefly crossed above zero a handful of times since early 2011 – but the most recent developments in the forward rate show that for now, Saudi Arabia is a concern that is at least on traders’ minds. And it implies that there’s some worry that Saudi authorities will take the rare step of depreciating their currency, something it would only do in a severe situation.

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Comments (40)

flatbroke
Posted on October 5, 2012 at 4:32pm
So maybe drilling for our own resources here in America seems to be looking better and better, but only if Romney wins the election.

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rsanchez1
Posted on October 5, 2012 at 1:25am
Wow, Iran is experiencing instability while getting more fanatical against Israel, Saudi Arabia, a key supplier of oil, is also experiencing economical instability, and now Syria is attacking Turkey and Turkey is looking for NATO assistance.

There’s a war brewing in the Middle East, and it won’t be against powers that are easy to overwhelm like Iraq and Afghanistan were. Stock up on supplies and pray for friends and family in the military.

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stuharnden
Posted on October 4, 2012 at 11:49pm
I live in Wyoming. We have more natural resources than any other state. Right now the price of natural gas has fallen by 1/2 in 2 years because of the over supply. We are shutting down natural gas wells because of low demand and lower prices. We could use this gas to power cars with a small investment in natural gas refueling stations. This has been around for some time as I built natural gas stations in Dallas TX. about 14-15 years ago at that time we did not have the supply of natural gas that we have now. Right now they are getting ready to build a coal to gasoline plant at one of our coal mines. We have so much coal, natural gas, oil in this country we would never have to worry about the Arab States supply again. We need to “JUST DO IT”. We could create 4-5 million jobs with mining and drilling our resources. We could build power plants at our coal mines, build transmission lines and oil refineries at the source of supply. We could get this country rolling again with all of the jobs needed to do this besides all of the support jobs it would create. Construction,mining,pipe lines coal plants, power lines and all of the support businesses it would require. We have to start to do this, a good start would to be lock up all of the Al Gores that sue us every time we try to do anything with our natural resources.

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- Cemoto78
  Posted on October 5, 2012 at 1:09am
  It’s way past time this government opens up the resources of this country before it’s too late.
  
  Report this comment
- chucksue351
  Posted on October 5, 2012 at 6:24am
  why does the government have so much control and ownership of the lands of this country, except for the national parks they should have no say in how the resources are utilized
  
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kettererbg
Posted on October 4, 2012 at 10:04pm
It is very simple. It is hard to sell oil if you are dead or the oil is radioactive. Or, they may have run out of oil all together. I had heard a few years ago that sea water is being found in their oil. Regardless, these vermin have gone from rags to riches and over time will be back in rags, wandering the desert like they used to. A fool and his money will soon part ways. Poetic justice.

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- ThoughtfulConservative
  Posted on October 4, 2012 at 11:44pm
  Much kudos for the proper; and ever so fitting, use of a cliche. However, I would like to point out that when it comes to “a fool and their money”… we as America kinda set the bar with that one. We take the cake…
  eat half…give the other half away… while ordering more and dropping most of it on the floor. :) Merica!
  
  Report this comment
- rsanchez1
  Posted on October 5, 2012 at 1:26am
  We parted ways with our money a long time ago. We’re getting deeper and deeper into a debt abyss.
  
  Report this comment
- yiddishlion
  Posted on October 5, 2012 at 1:58am
  This is for THOUGHTFULCONSERVATIVE;
  
  8 And above all things have fervent charity among yourselves: for charity shall cover the multitude of sins.
  
  No one even comes close to the U.S.A. in that department. Make no mistake, we are currently under judgement by God, but he will never forsake a good man. We have the lion’s share there too.
  
  Report this comment
environmentalandawake
Posted on October 4, 2012 at 7:25pm
I harken back to a day when Americans built individual bomb shelters. You see I live in the Tri-Cities WA and some of those shelters still remain in the Back yards of the houses here. Why is this important? Quite simply, the government wasn’t taking care of individuals concerns so the citizens took care of their welfare on their own. In a similar fashion we should start to produce energy at our homes by whatever creative procedure we can imagine. Yes I even mean producing your own bio-fuels. Here’s the problem. There are people in the driver’s seat who won’t rock the boat. Obama is a paper champion! He subscribes to increased bureuacracy to slow industries actions so they may consider the environment. Think ISO 14000. What we need to do is encourage the individual to seek solutions in their back yards and work with industry to solve these dependancies on foreign energy. We live a falacy of cheap energy when you consider the money we pay for the military to “Secure those Regions.” I concepted an algae open pool system that would use water three times before ultimately watering the golf course at WSU. Everything is in place it just needed a little vision; however the higher ups love business as usual due to the comfort zone they create. We need to get uncomfortable, and do it soon!

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right field
Posted on October 4, 2012 at 5:54pm
We must become energy independent – This may be our only hope of saving our country.

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IC Lemmings
Posted on October 4, 2012 at 4:52pm
Use to live in Riyadh in the 90′s was a very interesting place. I enjoyed it my time there and it was a real learning experience.

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- LetUsReason
  Posted on October 4, 2012 at 5:49pm
  Yes, I actually really like Saudi Arabia. I grew up in Dhahran….Gulf War and all. Good times!
  
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- JokerWatcher
  Posted on October 4, 2012 at 6:19pm
  Worked in Dhahran, lived down in Khobar
  
  Report this comment
MOLLYPITCHER
Posted on October 4, 2012 at 3:57pm
Trouble is brewing in the middle east?!!! Who would’ve thunk?

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- Snowleopard {gallery of cat folks}
  Posted on October 4, 2012 at 4:42pm
  Big problems are on the way, and all too soon.
  
  Report this comment
- KangarooJack
  Posted on October 4, 2012 at 8:44pm
  After last night’s debate, I imagine many in the Middle East are considering their options.
  
  But BUT if you actually glance at the other hand! Russia is not too happy about our {Gee, who woulda thunk it} discovery of Natural Gas via fracking and Mitt’s high-5 to Clean Coal. Nope, they aren’t too happy at all about that. China’s economy is about to implode. Turns out building Ghost Towns in the middle of nowhere has finally caught up to them. They were counting on Obama to roll over, whimper, pee himself, and lick the hand that beats him.
  If Romney wins-it’s a whole new ballgame folks. {Yet, not that new-recall the days when our Righteous Indignation MEANT something. The days when retribution for the killing of an American Ambassador on Sovereign American Soil was swift AND deadly.
  
  The wheels are turning -they have been. Only difference now is that little tiny wheel that has started a really BIG wheel turning. Israel better watch it’s a**. The time table just did a “Spring Ahead” move and it will be reckless.
  
  Report this comment
- Armyduderetired
  Posted on October 4, 2012 at 11:41pm
  Israel can hold its own. The USA only imports about 24% of our oil from the Middle East. Most of it goes to Asia and Europe. We need to just leave the entire area and let nature take its course.
  
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huey6367
Posted on October 4, 2012 at 3:48pm
they seem to want war. This would start one. Or revolution.

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South Philly Boy
Posted on October 4, 2012 at 3:13pm
I guess they finally figured out just how much CAMEL CHIPS are Really WORTH

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KidCharlemagne
Posted on October 4, 2012 at 3:10pm
I’m inclined to believe that this is probably a speculative attack that has been launched against the Saudi Arabian currency….

If I had to guess, then I would say that this is probably a retaliatory action for the rather sudden and dramatic depreciation of Iran’s currency (the Rial) right now…

Attacking your rival’s currency is historically a rather effective method of waging war:

_______________________
The British had a distribution network of “shovers” or people who used the counterfeit currency in the tories, colonists who remained loyal to the British government.

Two of the British shovers, David Farnsworth and John Blair, were arrested in Danbury, Conn., with $10,000 in counterfeit currency on them. One of their excuses to try and avoid prison was that they were petty criminals compared to other shovers who were circulating $40,000 – $50,000.

Aftereffect of British Counterfeiting

Though Great Britain lost the war, America nearly collapsed because of the counterfeiting. American currency was so devalued by 1779 that Congress decided that they couldn’t print any more.

The country then moved to using gold and silver coins because they were harder to counterfeit.
British Counterfeiting of American currency almost killed the American Revolution..

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- Norm D. Plume
  Posted on October 4, 2012 at 3:47pm
  Thank you for this.
  
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- jaylew
  Posted on October 4, 2012 at 6:17pm
  It’s kind of hard to counterfeit gold and silver. Your post is very interesting and salient….the only difference between the Federal Reserve “printing money out of thin air”……and a counterfeiter is that the former is unfortunately legal and the latter is properly not……but in both cases the literal effect and affect is the same.
  
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- rsanchez1
  Posted on October 5, 2012 at 1:30am
  British got it back nice and hard with Soros, the “Man Who Broke the Bank of England”.
  
  Report this comment
Pro-Palin
Posted on October 4, 2012 at 2:38pm
Mutiny ,
I do think we have a refinery issue when we have to pipe thinks from Canada to the gulf coast and refine it their. Of course we can always use Warren Buffets trains since we aren’t making a pipeline. Why cant we refine much if not most of it in the middle of the USA. We do have a lot of our eggs on one basket. We loose it to hurricane or other things we are finished we need more growth in the middle for ourselves and not others. When we don’t have to rely on the Saudis and others we will be better off as a nation not only in a political sense but in a job growth sense. No more storm spikes that cant be managed by sources from the interior. Cheaper fuel more employment lower trade deficits and a thriving nation. This along with all of the above smartly pursued is the bast way fwd.

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- JethroUSMC
  Posted on October 4, 2012 at 8:19pm
  Because of the NIMBY mentality – Not In My Back Yard. Have you ever been around a refinery or seen one in person? They’re huge! They sometimes have fires (Kalifornia has plenty) and light up the night wherever they are.
  
  Also more above or below ground pipeline would have to be constructed to transport oil. The XL pipeline is a great start but not even close enough to what we need. Also we can refine enough for ourselves, but the oil companies need to export some, which requires deep water nearby to fill tankers for export.
  
  Report this comment
- coldnorth
  Posted on October 5, 2012 at 2:49am
  companies want to build refineries in North and South Dakota, but they have to get past the EPA. And the EPA can cripple the process for so long that companies will just back out before they sink to much capital into it.
  
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thibx
Posted on October 4, 2012 at 2:26pm
oil prices is tied to the dollar. qe1,2,3 has hurt us. the dollar is no longer tied to gold. i think johnson did that.

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- lildrummerboy
  Posted on October 4, 2012 at 2:39pm
  Nixon helped
  
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- 762x51
  Posted on October 4, 2012 at 4:50pm
  Johnson drove up spending, typical Democrat, to where our deficit was greater than the amount of gold we held in Ft. Knox. When Nixon took office, instead of reducing spending and getting us back to solvency, he took us off the gold standard.
  
  Nixon was a Republican Progressive.
  
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thibx
Posted on October 4, 2012 at 2:21pm
threats of war with iran and israel, shuting down of the straight. they could be hit if iran bombs israel. they know oboma is not on the side of israel so there is no help there. saudi is not on the side of israel but they want to keep selling oil. maybe threats of war in the whole region. all the different terrorist groups in the regions the fighting of sunni and shei sects. will be interesting to know what is going on.

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- JimL
  Posted on October 4, 2012 at 2:54pm
  wwii: pipeline from Texas to Phila complted in months.
  
  wwiii: NG power in every town or chicken feather promises?
  
  Report this comment
progressiveslayer
Posted on October 4, 2012 at 2:08pm
Let’s put 1.5 trillion barrels of shale oil on the world market and see what that does to the price of oil.
Put all our NG on the world market and see what it does to the price of NG. We’ll have to wait until Jan 20 2013 to do that though because our POS fraud in chief won’t be fired until then.

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- Mutiny
  Posted on October 4, 2012 at 2:17pm
  Oil is tied to gold. Gold is a hedge against inflation. We inflate our dollars with QE1,2,3 that is why gold and oil prices are up. Those three things work in harmony with each other. We do not have a oil supply problem, we dont have a refinery issue, we have a weak dollar issue. Obama and Romney do nothing to really cut the overspending and neither will touch the FED so energy prices will continue to skyrocket until we completely collapse.
  
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- JRook
  Posted on October 4, 2012 at 2:35pm
  @Mutiny What your missing is that we are actually in a deflationary situation which can be measured by how little inflation there is despite the QE. Deflation is an economic cancer. Real wages in the US, which should be continuing their slide that began under Reagan, are holding steady because of the excess currency. The three long term issues facing the US is the decline in real wages since 1980′s due to outsourcing of jobs, the concentration of wealth and the fact that neither large corporations or the wealthy give a damn about this country any longer. These 3 continue to erode the middle class. One of the best things we could do in the tax system is have only income for US investments qualify for the 15% capital gains rate. Investments outside the US by individuals or companies should be taxed at normal rates. Why invest in high tech, high productivity factories in the US if you can get labor in China for $1 an hour with little if any add on costs. A great indication of how disengaged the wealthy are is Romney keeping his money in off shore accounts, hiding behind shell companies and utilizing IRA tricks to defer taxes on $100 million. No doubt a man of great character, ethics, integrity and citizenship.
  
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- progressiveslayer
  Posted on October 4, 2012 at 2:35pm
  Oil is priced in dollars for now,because the dollar has reserve currency status for now and when that changes oil and gas will be very very expensive,maybe unattainable for most.If we don’t exploit all our natural resources and kill all green energy BS programs we’ll always have skyrocketing energy prices.
  
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- JRook
  Posted on October 4, 2012 at 2:40pm
  @progressiveslayer You hold yourself out to be smart and informed. Perhaps you can explain why the oil companies have been sitting on 200+ approved drilling permits since before the BP Oil spill. And why we are exporting gas now from the US. And of course why the oil from the Keystone pipeline is also scheduled to be exported. And when you done let me know your conclusion on who benefits from oil and gas prices being high.
  
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- progressiveslayer
  Posted on October 4, 2012 at 3:04pm
  Jrook Sounds like you believe the BS line from the regime that the oil companies are sitting on all these leases,good for you.Oil and gas being high according to whom? If you adjust for inflation gas isn’t ‘expensive’ in today’s dollars.
  
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- KidCharlemagne
  Posted on October 4, 2012 at 3:23pm
  JRook
  Posted on October 4, 2012 at 2:35pm
  
  @Mutiny What your missing is that we are actually in a deflationary situation which can be measured by how little inflation there is despite the QE.
  ========================================
  
  There is a really good reason for that:
  
  _________
  “A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, and commodities such as oil, gold, etc.
  
  This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.”
  Wikipedia: Reserve Currency
  
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- Mutiny
  Posted on October 4, 2012 at 4:33pm
  @kid
  
  Until the game is up and other countries start realizing the the reserve currency is a sham. Then they start trading in their own currencies ( which countries like Russia, China, Iran, Pakistan, India, and a few others are already doing) then the demand plummets for the reserve currencies. Once that happens hyper inflation hits and the whole system crashes.
  
  Report this comment

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