Saudi riyal forwards tumble after regulator bans speculative trades

07/06/2016 07:06 AST

The Saudi riyal fell 23 per cent on Monday in the one-year forwards market as volumes tumbled after the central bank restricted the use of forwards for speculative purposes. One-year Saudi riyal forwards were down to 500 points on Monday, from about 650 points on Friday, a decline of 23 per cent week-on-week.

The Saudi Arabia Monetary Agency (Sama) told banks to ban dollar-riyal forward structured contracts with immediate effect, but allowed transactions backed by actual goods and services.

“The move is much in line with expectations and at [a] time of heightened volatility, it makes logical sense to control speculative trading and this is what Sama has done,” Anita Yadav, head of fixed income research at Emirates NBD, told Gulf News. Volumes traded have fallen dramatically after Sama restrictions, she added.

The move has been the latest from Sama after it ordered banks to stop selling options contracts on riyal forwards at a meeting in Riyadh on January 18. The forwards are used by traders to speculate whether the kingdom may adjust its currency peg after three decades at 3.75 per dollar.

Cost of insuring debt

Credit default swaps, which are the cost of insuring debt, meanwhile, remained unchanged. Five-year credit default swaps for Saudi Arabia stood at 165 basis points (bps), unchanged from Friday’s close. They were unchanged on a week-on-week basis as well.

Abu Dhabi was unchanged on Friday’s close at 99 bps. Dubai tightened by 2 bps week-on-week to 214 bps.

Bahrain fell 18 bps week-on-week to 354 bps on Friday due to stability in oil prices. “[The] sentiment in Bahrain seems to have stabilised at [a] very low level,” Yadav said. Oil prices extended gains on Monday afternoon supported by a weaker dollar and production outages in Nigeria, though rising US rig counts kept the upside limited.

Brent was 1 per cent higher at over $50 per barrel. The commodity has gained more than 80 per cent from its January lows of below $30 levels.

GCC bonds yields were down following a collapse in US yields on Friday after weaker-than-expected non-farm payroll data.

Gulfnews