How did the GCC political rift impact the Qatari riyal?

At times of volatility and risk, investors often trade stocks down, but what happened to other Qatari asset classes post recent events?
By Markets Chimp

6/9/17 3:16 AM

After certain GCC countries and Egypt cut ties with Qatar on an accusation of the latter of supporting terrorism, Qatari stocks were in a free fall. However, this was not the only asset class in Qatar that suffered from the unfolding events. Besides Qatari’s equities, 10-year government bonds fell pushing yields higher by some 30 basis points (i.e. 0.30%) to 3.46%. Bond yields move in the opposite direction of bond prices, with higher yields reflecting higher risk or lower demand for bonds, and vice versa.

Also, another asset class that is often neglected in GCC countries is currency. GCC currencies are all pegged to the US dollar (except for Kuwaiti dinar which is pegged to a weighted basket of hard currencies). This means GCC currencies are always going to be stable vis-à-vis the US dollar as local central banks follow in the footsteps of the US Federal Reserve’s interest rate hikes and use their foreign reserves in stabilizing their currencies throughout. Nonetheless, the recent events pushed the Qatari riyal lower to trade at 3.6525 for each US dollar versus only 3.64 before the events unraveled. While this is somewhat a marginal drop of 0.3%, it is quite remarkable considering the peg. Please see the jump in the price of one US dollar versus Qatari riyal in the below chart.

Another asset class, yet related to currencies, is non-deliverable forward (NFDs) contracts that are considered part of derivatives. Such forward contracts help investors hedge against fluctuation in currencies by taking today either a long or short position in the future. The forward rates imply market expectations where the currency is expected to be in the future, depending on the contract’s term. In the below chart, Qatari riyals NDFs for 3-, 6-, and 12-month all jumped 0.57%, 0.68%, and 1.38% to 3.67, 3.68, and 3.71 for each US dollar, respectively. This implies that market participants expect or are worried rather that the Qatari riyal could weaken within the coming 12 months.

Also another derivative, Qatar’s credit default swaps (CDS) rose on the news, reflecting a higher risk environment. Qatar’s CDS rose by around 50% from 60 basis points to almost 100 basis points of 1.00%. This means it now costs more to insure against the default of Qatar’s government bonds. The chart below shows the abrupt jump in CDS to a 6-month high.

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