U.S. dollar-Saudi riyal forwards surge after strong demand for dollar

The Saudi Riyal slumped to its lowest since March 2011 against the U.S. dollar in the forwards market in Tuesday after a surged in demand for the U.S. dollar in the spot exchange market.

The one-year U.S. Dollar/ Saudi Riyal forwards jumped to 120.0 points, the highest level since a March 2011 high of 91.50, back when the Arab Spring uprisings sparked political uncertainty in the Middle East.

Forward rates are used by international investors as an indicator of risk in the region, and to hedge against market fluctuations.

The rise in U.S. dollars in the Saudi Arabian foreign exchange market may be due to the recent slump in global oil prices as well as a sharp fall in the stock market in Saudi Arabia, traders told Reuters.

Demand for the dollar has pushed the spot riyal of the riyal notably over its 3.75 peg against the dollar. The USD/SAR spot rate traded at 3.7518 on Tuesday, topping the 3.7510 for the first time in many years.

Traders said banks are not panicking over this, but demand for forwards was because the dollar demand had pushed the riyal’s spot rate abnormally beyond its peg.

The Saudi Central Bank provides the necessary supply of dollars to keep the riyal close to its peg. A large outflow of money from Saudi Arabia could have been the catalyst, as the amount of outflow of riyals into USD has surpassed the amount supplied by the Central Bank.

With Brent crude oil prices falling below $84 a barrel, Saudi Arabia’s government finances could be headed for a deficit next year.

Also, Reuters said that markets were reacting to trade to two- and three-year riyal options by U.S. hedge funds.

The one-year USD/SAR options implied volatility jumped to its highest since March 2010 on Tuesday.

This comes amid a range of media reports questioning the health of Saudi Arabia’s King, Abdullah ibn Abdilaziz.