Qatar forwards at 1-year low on central bank comments on peg; UAE, Saudi fall

Reuters/Dubai

Qatar’s one-year currency forwards fell yesterday to their lowest level since May 2012 after the central bank hinted the country could drop its peg to the dollar, although the market expects that any change would be years away.

One-year riyal forwards dipped as low as 10 points bid yesterday from Tuesday’s close of 65, traders said. They still suggest a very slight weakening of the riyal from its peg of 3.64 to the dollar over a one-year period.

“Qatar fell because of yesterday’s news and also the prevailing liquidity with the offshore,” said a Dubai-based trader, who cannot be named under the briefing rules.

Qatar Central Bank Governor Sheikh Abdullah bin Saud al-Thani told Reuters on Tuesday that a higher degree of exchange rate flexibility may become more desirable in the future when the Opec member becomes less dependent on hydrocarbons. However, he said no changes were currently being considered.

The United Arab Emirates’ dirham forwards also fell, slipping to -16 points bid, their lowest level since December 2011, while the Saudi riyal forwards touched -21 points, their lowest level since the start of September 2012.

Negative forward points imply a stronger currency compared to the peg over a one-year period.

“They fell because the market thinks that the Qataris and others might be thinking about their policies and currency plans again,” another trader said.

Last week, the Qatar riyal forwards dropped 45 points to 30 points after the central bank’s research and monetary policy head started the peg discussion, saying that Qatar and other Gulf states should consider moving to a more flexible exchange rate regime to better manage inflation risk in the next decade.

Yesterday, a comment by Standard & Poor’s that Saudi Arabia’s peg to the dollar constrained its rating also fuelled the market activity, traders said. The agency revised the kingdom’s rating outlook to positive.

Some traders said Gulf currency forwards were likely to remain under pressure in the near term. However, they are still very far away from levels seen in 2008, when speculation on the viability of dollar pegs in the region swirled.

In 2008, before the collapse of Lehman Brothers and the global financial crisis, hot money poured into the Gulf on speculation that record high inflation and surging oil prices would force the region’s oil-producing nations to abandon their currency links to the dollar. The market bet on as much as a 4.9% strengthening of the Qatari riyal in April 2008.

But conditions today are quite different. Inflation remains in low single digits in all Gulf countries, oil prices are some $44 below the 2008 record high and the dollar is strong.

“There’s no immediate pressure to change a currency regime which has served the country (Qatar) well for many years,” said Simon Williams, chief economist for the Middle East at HSBC.

 “In contrast to 2008 - the last time there was pressure on the pegs - growth is slowing, inflation is benign and the dollar is strong,” he said.

Kuwait is the only Gulf Arab country to have dropped the dollar peg. In 2007 it shifted to trading its currency against an undisclosed currency basket of main trading partners. The basket is, however, believed to be heavily dollar-dominated.