Will Saudi Arabia De-peg Its Currency To Stay Afloat?

Speculators test Saudi currency as oil crisis deepens

Saudi Arabia’s currency regime is at risk of blowing up if oil prices fall further and the US dollar spikes higher, Bank of America has warned.
The Saudi strategy of flooding the world with oil in a bid to drive out rivals may be hard to square with the country’s fixed dollar-peg, which is increasingly under scrutiny by currency traders as the US Federal Reserve prepares to raise interest rates.
“The crucial point is what happens to the Saudi riyal. Saudi Arabia’s foreign exchange reserves still provide an ample buffer, but they have been falling fast,” said Francisco Blanch, the bank’s energy strategist.
“Should Brent crude oil prices drop to $30, we estimate the foreign exchange reserve drain could accelerate to $18bn per month. Saudi Arabia may face a critical choice: cut oil supply, or de-peg,” he said.
The 12-month riyal forward contracts – watched by experts for signs that traders are betting on a collapse of the peg – has spiked violently to 535 from just 13 points in June.