Oil price rise hurts Saudi riyal devaluation bets

With crude oil prices holding firm above $40 a barrel, investors who bet against Saudi Arabia’s capability to maintain its currency peg are in for losses, a Bloomberg report said.

Contracts that speculate on the country’s exchange rate over the next 12 months have fallen to nearly the lowest since November, it said, adding that several U.S.-based hedge funds were said to be among those betting in favor of Saudi Arabia devaluing the riyal.

According to the news agency’s calculations, a $1 million wager on the contracts at their peak in January would have lost SAR 68,900 ($18,370), or about 1.8 percent.

The kingdom has made the Saudi riyal, which has traded at 3.75 per dollar since 1986, harder to speculate against.

The peg has survived high and low oil prices for 30 years and recent losses will not “change policy makers’ minds or force their hand,” said Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holding.

Other than Saudi Arabia, the 12-month currency forward agreements have declined for the other five members of the Gulf Cooperation Council (GCC). 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, the report said.

Bahraini dinar and Qatari riyal forwards have also declined.

The GCC members have enough reserves to maintain pegged exchange rates for several years, despite weak oil prices, Moody’s Investors Service senior analyst Mathias Angonin said in Dubai last week.

The benefits of the pegs still outweigh the costs associated with one-off devaluations, he added.

The U.S. Federal Reserve decision to hold off further increases in interest rates has also relieved the pressure on Gulf currencies’ dollar pegs, as a weaker U.S. dollar usually means more stable commodity prices, the report said.