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Dubai: While other markets in the Gulf have seen a jump in their inter-bank rates over US rates, UAE rates have been trading at a discount which will be gradually corrected, a BNP Paribas note on Gulf currencies said.
"The dollar's rebound is causing hedge funds to close their long positions in Gulf currencies. We believe this offers some opportunities, especially in the UAE, where the markets remain long and where we would expect local interest rates to catch up with the moves seen in other markets," the note said.
At the time of writing the note last Friday, based on Thursday's data, UAE's local inter-bank rate was below the dollar rates. But since then, over the weekend on Sunday, it broke above dollar rates, said Shahin Vallee, strategist at BNP Paribas in London, told Gulf News. "So we are seeing UAE catching up progressively."
However, there were reasons for the UAE rates trading at a discount to US rates. The monetary authorities, especially of Saudi Arabia and Kuwait, have been active in draining excess liquidity, leading to their local inter-bank rates going above the US rates.
Tightening conditions
Saudi Arabian Monetary Agency (Sama) and Central Bank of Kuwait have been involved in the fight against speculation and have focussed on tightening local monetary conditions, Vallee said.
According to the note, Saudi Arabia was aggressive in terms of issuance of Treasury-bills and Kuwait recently said that it would stop supporting local banks on spot transactions for non-commercial transactions.
In the UAE, there has not been an increase in the amount of CDs issued, Vallee said.
"There has not been a policy decision to take liquidity out of the market to drive local rates higher the way it has been in Saudi Arabia."
Also, Saudi Arabia's position on de-pegging and revaluation are reasons for speculative trade closing down. "Because the inter-bank liquidity is linked to trading on FX forwards and people have closed their positions on FX forwards very quickly in Saudi Arabia, there is an expectation that it will be the most resistant country to de-peg," Vallee said.
"Also, people have some doubts about any currency evaluation in Saudi Arabia and so have closed their positions in Saudi Arabia first and kept it a little bit open in the UAE. Liquidity in the UAE market was also more ample and longer," he said.
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