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UAE, Saudi forwards at over 1-mth low on soft dollar

UAE, Saudi forwards imply bets on stronger currencies.

October 8, 2010 8:49 by



United Arab Emirates one-year currency forwards fell to their lowest level in over a month on Thursday, showing investors betting the dirham will hold its value over the next year.

Until a month ago forwards implied a slight weakening of the dirham over the course of the next year, but an improving view of Dubai’s finances and a flood of dollar liquidity on global markets has helped turn that around.

Forwards now imply the currency of the world’s third largest oil exporter will hold near its 3.6725 peg to the greenback over a one-year period.

One-year dirham forwards dipped as low as 18 points on Thursday , from 30/35 points at the start of the session. They are well down from some 105 points in February, seen due to uncertainties about Dubai debt restructuring.

The fresh inflow of money from abroad has also improved liquidity in the UAE banking sector, pushing longer interbank offered rates to multi-month lows.

“The Fed is certainly ready to add liquidity, the dollar is weak across the whole board,” said Chris Turner, chief currency strategist at ING in London, saying that had knock on effects for currency pegs in the Gulf.

The dollar fell to eight-month lows against the euro on Thursday, while oil jumped and gold rose to a record high as investors bet huge injections of funds into their economies by developed central banks would support risky assets.

The Saudi riyal forwards also touched the lowest levels in at least a month of -128 points. Traders use forward markets to bet on future directions of currencies.

“We feel the continuing weakening of the dollar internationally will add to the current selling momentum of GCC forex swaps,” said Lyndon Loos, head of forex trading for Middle East and North Africa at Standard Chartered in Dubai.

“Initial support in the 12 months on dollar/dirham is at par and on dollar/Saudi riyal minus 150. We do not foresee any pressure on the dollar peg,” he said.

CDS, RATES IMPROVE

Last month’s deal of state-owned Dubai World to restructure $24.9 billion of debt has improved confidence, helping the Gulf emirate draw demand of over $5 billion for its first bond issue in a year.

“In Dubai, because of the debt deal and the bond, there is renewed interest in the country,” said Elisabeth Gruie, emerging market strategist at BNP Paribas. “We have seen that impact in the CDS market heading lower as well as the forward market.”

Dubai’s five-year credit default swaps, the cost of insuring the emirate’s debt, fell to 377 basis points on Wednesday, their lowest since November 2009 , well below around 634 points in February. They stood at 385 points on Thursday.

The benchmark UAE one-month offered rate held at a five-month low of 1.77625 percent at the central bank’s fixing on Thursday, still well above the Saudi benchmark at 0.34688 percent .

“A lot of flows are coming to the country. The market is more liquid,” said a trader at a UAE-based bank.

The UAE three-month rate fell to 2.25375 percent, its lowest since March, from Wednesday’s 2.26625 percent. Longer rates had been keeping high over the past months as banks exposed to Dubai debt chased deposits.

(Additional reporting by Martina Fuchs in Dubai and Carolyn Cohn in London)



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