from Follow the Money

The slumping Riyal (and RMB)

June 5, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Just a reminder.  Oil is up something like 20% this year, at least in dollar terms.   The Saudi riyal is down almost 9% this year, at least in euro terms.  And given that the Saudis import far more from Europe than the US, the euro is what counts for them.    In real terms, oil is up – and the external purchasing power of the world’s biggest oil exporter is down.

That was the trend this year through Friday.  

And it certainly seems to be the trend in the market today – with the dollar coming close to 1.30 and oil well above $70.   

The Chinese haven’t (yet) been willing to let the RMB breach 8 -- at least not on a sustained basis.  They flirted with it a couple of weeks ago, but the RMB has subsequently hugged 8.  Which means that the RMB also has depreciated along with the dollar.  No basket peg.  At least not yet.    I thought the point of adopting a basket was to give China the option not to follow the dollar down.  So far, the Chinese authorities have opted not to exercise that option.   Personally, I think that will prove to be a policy mistake. 

I continue to think that the biggest distortion in the world economy comes from the fact that the countries with the biggest “oil” current account surpluses (the key Gulf countries) have pegged to the slumping dollar – as has the country with the biggest non-oil current account surplus (China).

Saudi reserve growth (using total foreign assets rather than narrow reserves) in April was surprisingly low -- $2.4b.   That is well below the roughly $7.5b monthly pace in the first three months, even though oil was a lot stronger in April.  I don’t know enough to know why.   Clearly it was not a shortage of cash.  Never fear, Russia continued to pile up its reserves.   It added $17.4b to its reserves between the end of April and the 26th of May.    Its China-like pace of reserve accumulation continues.  

And Russia’s reserve growth in April and May – over $15b a month -- gives some indication of scale of the monthly flows coming into Saudi Arabia.  The Saudis, after all, have more oil and fewer people than Russia.  And if you add up the other small Gulf countries, they combined are probably adding a comparable sum to their investment authorities accounts.

That’s real money.  And apparently not all of it is flowing back to the US …

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