Is Saudi riyal about to blow? Are you short?

There was a story posted on Zerohedge and Tom Hickey posted it here about how Saudi Arabia is now either contemplating or starting to pay contractors with IOU's.

Either or, it's a sign that there could be a full blown dollar liquidity crisis brewing there.

As you know the Saudi's peg their currency--the riyal--to the dollar at $3.75. That costs reserves and while they have quite a lot of reserves they also need that for servicing dollar denominated debt, which has skyrocketed in the past two years.

And we all know that oil prices are way low.

So the question is, will this put pressure on the Saudi's to abandon the dollar peg? If so, the riyal will collapse.

I am short a small riyal position and I have been for a while. You can short it on Oanda and it just so happens that I teach my Forex course on Oanda.

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Everyone should short the Saudi riyal

Everyone should short the Saudi riyal. Saudi Arabia pegs the riyal to the dollar at $3.75 and in order to do that (effectively, hold its currency up at some artificial rate) it has to sell dollars to buy riyals.

Problem is, the Saudi's don't have an unlimited supply of dollars and while they do have some supply, it is growing smaller by the day because of the collapse in oil prices. In fact, anecdotal evidence says they might be in trouble because as Matt Franko pointed out in an earlier post, their oil monopoly, Sudid Aramco, is thinking of selling shares via an IPO.

Bottom line...looks like they could be in trouble.

If this peg breaks the riyal is going to implode. You could even get hyperinflation there, which means that a small investment could quite possibly make you a lot of money. Talk about "The Big Short!" Wow!!

Oanda has a USDSAR contract. You buy that, which means you are effectively shorting the riyal.

One caveat, which Matt Franko and I discussed privately...if this were to happe the idiots at the Fed may give the Saudi's unlimited dollar swap lines like they did with the Europeans. If so, that would kill our profit potential. It's definitley a possibility since the necoons in Washington would ot want to see the Saudi regime collapse and they would put a lot of pressure on the Fed to keep the Saudi's afloat.

Even so, I think there is little risk. Just time risk.

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