US$ / Saudi Riyal - The Bond (will not) Continue?

EDIT: I wrote this post last night 9/19 out of curiousity, turns out today 9/20 the markets got shaken. Will follow with interest. There are mixed reports as of now what is going on with the Saudi Riyal. All I am aware of is this, the USD/SAR just moved today more than it has in years.

The title isn’t the best, though I wanted to represent my feelings on this issue. Saudi Arabia is suffering its fastest pace of inflation in seven year. Much of this, I would presume, is due to the U.S. Dollar. Although the Bank Governor of course denies that the Riyal strength has anything to do with the rising inflation. See, the U.S. Dollar and the Saudi Riyal have a bond that has survived for over 20 years. Since 1986, the Riyal has been fixed at the same value against the U.S.$. Through good and bad, the Riyal sticks to it and maintains that loyalty. But will they now? Could there not be benefit to removing themselves from the bind of the U.S. $ fix?

Kuwait back in May adopted a basket of currencies to “fix” itself against to avoid the risk of incredibly high inflation. Though why fix? Is there that remote chance that a region leader, which Saudi Arabia is, actually let their currency go to the markets will? Jumping ship on the U.S. $ fix may be a good start. Though this trader certainly would welcome new life given to the bound currencies around the globe. Hong Kong Dollar has a range that it trades in; perhaps something like this will be appropriate?


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I do not know much about economics or about the subject of fixed currencies, nor the economy of Saudi Arabia beyond their oil exports. Perhaps someone who lives in Saudi Arabia, works in Saudi Arabia or understands the dynamics of fixed rates and their place in upcoming history may comment? I opened this thread for those smarter than myself, I am just interested in world currencies. Thanks

Stockkjay,

You are correct in your analysis of the situation. The Saudi's inflation rate is at an unsustainable pace and given they can't slow the inflows any other way than to cut the peg.

The next logical step inside the kingdom if the House of Saud wants to stay in power is to start accepting payments for crude in other currencies other than the dollar. If they Saudi's were to do that....look out below for the $US, the other OPEC nations would follow suit and the $US dollar's reserve currency status would be gone.

Here is a much better article than my musings on the situations: http://www.telegraph.co.uk/money/mai...cnsaudi119.xml

GLGT,

Mike

Mike,

Thank you very much for the article. I had found articles discussing the relation, though none dated so recently. One thing I found interesting was this statement in the very first sentence "refused to cut interest rates in lockstep with the US Federal Reserve for the first time." I have looked at past history of interest rates, and there has been some divergence between the two. Perhaps the Saudi Central Bank will still cut rates? If not, then you are likely very correct in your statements that they will discontinue their peg against the U.S.$

I am no Einstein, though if the Federal Reserve lowers rates just once or twice more, and the Saudi Bank does not and yet continues with their fix, there will be an absolutely zero risk interest carry (Unless there is something I am missing?). As everyone knows, there is no free money to be made in this market. Thus there is only a set of things that can happen. Saudi Arabia lowers their rate, continues their fix against the USD at 3.75 roughly and suffers through hyper-inflation, or ... releases their currency. Whether they create a basket like Kuwait did is probably the most likely scenario, though one can only wish that they let it go to the markets with minimal binds. If the basket does occur, I will personally be expecting a very similar move that occured with the USD/KWD. Easy money? We will see.

EDIT: It appears, according to an article by one of the Analysts on this site that Saudi Arabia has announced they will remove their peg against the U.S. Dollar. How was my post for timing eh? And then there is this which states the opposite. Although, it certainly isn't conclusive. http://www.bloomberg.com/apps/news?p...currency_rates

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Any further comments by the economists out there?