Devaluation fears fade in the Gulf, Tunisia’s dinar falls

Fears that low oil prices would force the Gulf countries to devalue their currencies have continued to fade over the past month. However, one country in the region where the authorities have loosened their grip on the currency is Tunisia. The dinar has depreciated by more than 10% against the euro since the start of April and we think the currency has further to fall. Throughout the past two-and-a-half years, we have argued that, despite low oil prices, policymakers in the Gulf would refrain from abandoning their dollar pegs and devaluing their currencies. So far we have been proved correct and it now seems that the markets have come around to the same view. In the largest Gulf economy, Saudi Arabia, the spread between local interbank interest rates and those in the US – an indicator of the premium demanded by investors to hold Saudi riyals – has narrowed further. The spread is now at its lowest level in two years. This chimes with other indicators of risk. CDS premia have declined and dollar bond spreads over US Treasuries have narrowed.