Qatari one-year currency forwards fell on Thursday to their lowest since late 2008, when speculation on Gulf dollar pegs swirled, after a new central bank measure boosted liquidity in the banking system.
The measure, which limited the amount of money banks could earn interest on with the central bank, gave an incentive to banks to pour excess cash into a $14bn government bond also on offer.
The central bank told Reuters it had capped the liquidity volumes it was willing to absorb from banks, but it had not moved its overnight deposit rate, which remained steady at 1.5 percent.
“With effect from Jan 17, 2011, the maximum consolidated volumes in QMR deposits and CDs, which earn an interest income for the banks, were limited to the required reserve of the respective banks,” the central bank said.
QMR is a monetary instrument through which local banks are allowed to deposit and borrow overnight funds from the central bank.
Until this week, forwards implied a slight weakening of the Qatari riyal over the course of the next year, but the central bank's move has turned it around.
Forwards now suggest the currency of the world’s top liquefied natural gas exporter will firm by around 0.1 percent from its 3.64 peg to the greenback over a one-year period.
One-year riyal forwards dipped as low as -30/00 points on Thursday, the lowest level since October 2008, from levels of around 45 bid on Monday, when the central bank introduced its new measure.
However, they are still far away from bets for as much as 4.9 percent riyal strengthening in April 2008, when speculators poured hot money into the region, hoping that Gulf Arab oil producing nations would abandon their currency links to the dollar due to record high inflation.
“The central bank limited the amount of Qatari riyals it can take from onshore banks on which it could pay interest,” said Mazen Barbir, forex dealer at Standard Chartered in Dubai.
“With the overnight facility capped and liquidity hitting the market, this resulted in a drop in dollar/riyal forex swaps as banks look to buy dollars on spot against the riyal, and selling the dollars outright, pushing out riyal funds,” he said.
Barbir said further direction depended on the actual size of local currency liquidity in circulation and maturities as well as any potential new issuance or facilities that may be introduced to manage it.
The central bank, which issued domestic bonds worth $13.7bn last week to absorb liquidity from local banks, did not say what the required reserve was.
“The only changes took place in the QMR and CD placement window, where earlier there was no cap in placement with the central bank. But now a commercial bank can use that window to only the extent of statutory reserve, which is 4.75 percent,” a market source said.
In August, the OPEC member’s central bank lowered its overnight deposit rate by 50 basis points to 1.5 percent in the first cut in over two years, which analysts have said was aimed at boosting Qatar’s non-oil economy and curbing capital inflows.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.