Saxo Bank has increased its margin requirements for clients willing to trade the Saudi riyal and the UAE dirham. With the currencies of both oil-rich nations being pegged to the exchange rate of the U.S. dollar, speculative pressure and bets on the collapse of the pegs are increasing.
Clients of Saxo Bank will have to put up with a 20 per cent margin requirement, which means that the leverage ratio on all currency pairs including the Saudi riyal and the UAE dirham is set at 1:5. Expectations about the collapse of these long standing currency pegs are stemming from the rapidly declining price of oil.
With Saudi Arabia and the UAE relying on the income from their oil exports to prop up the pegs, their foreign exchange reserves are exposed. Speculators are beginning to place bets that the currencies in the Middle East will have to be free floated or re-pegged at a different exchange rate due to the rapidly deteriorating finances of oil exporters.
Saxo Bank is aiming to limit the potential risks for its clients and for the brokerage in what could be a very violent move.
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The action is not comparable to the Swiss National Bank (SNB) event last year, due to the fact that most speculative positions are actually taken in the direction of the pegs collapsing.
In order for the currencies to rally, which would result in losses for speculators betting on their decline, Saudi Arabia and the UAE will have to spend massive amounts of their foreign exchange reserves to buy their own currencies.
In contrast, in the case of the EUR/CHF peg, traders were heavily betting on the exchange rate floor in the pair to be held at 1.20. Once the peg collapsed, the losses piled up in milliseconds with pricing disappearing from computer screens across a number of brokerages.
In a recent interview with Finance Magnates, one of the experts who had correctly predicted the collapse of the EUR/CHF floor, Martin Armstrong stated that the currency pegs will eventually go.
The changes for clients of Saxo Bank who are trading the Saudi riyal (SAR) and the UAE dirham (AED) are set to take effect globally tomorrow (22nd of January) at 11:00 GMT.