A Rare Occurrence In The Saudi Currency Market Tells You That Trouble Is Brewing In The Middle East

An important shift is developing in Saudi Arabian currency derivatives markets as Iran becomes engulfed in populist protests amid hyperinflationary pressures and armed conflict breaks out between Turkey and Syria, heightening concerns about tensions in the Middle East.
The 12-month forward rate on the Saudi Arabian riyal – or the difference between how many riyals traders think a dollar will be able to buy a year from now and how many riyals a dollar can buy today – has been hovering just above zero for the past two weeks.
In other words, as pointed out by BNP's Bartosz Pawlowski, traders are expecting the riyal to depreciate against the dollar. Or to think about it another way, people are betting that in a year, people expect that the dollar will be able to buy more riyals than that dollar is able to buy right now.
And that is something that almost never happens – unless markets are getting really worried about Saudi Arabia, one of the most stable countries in the region.
Here is a chart that shows the latest move above the zero level (that tiny blip at the far right) and also puts into perspective how rare of an occurrence it is for the rate to do so:

Bloomberg, Business Insider

The reason the SAR 12m forward rate is usually way below zero, as most of the chart shows, is because Saudi Arabia runs a massive trade surplus due to its central role as oil exporter in the global economy. In other words, one would usually always expect the riyal to appreciate against the dollar.

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