Violin pegs


  • Dollar pegged currencies, especially those of oil producers, will cry uncle and de-peg from the Greenback; Saudi and even Hong Kong pegs are at risk
  • Saudi Arabia has picked a seemingly horrible moment to float Aramco – sign of desperation?
  • Saudi Arabia’s oil price decimation may in the long run hurt it more than Iran because the Iranians are already hardened to economic crisis and the Saudis aren’t
  • Hong Kong has to remain relatively affordable to the mainland Chinese

THE SWISS SURPRISE: Remember Jan 15, 2015 when the Swiss surprised markets and relinquished their currency peg to the euro? The Swiss franc rose 20% to 30%. The Swiss National Bank (their central bank) could no longer afford to keep purchasing euros in order to keep the Swiss franc relatively low, especially in the face of invigorated quantitative easing (QE) from Mario Draghi, President of the European Central Bank (ECB).

OIL DOLLAR PEGS ARE TENUOUS: Well, in a similar (but opposite) vein, maintaining the U.S. Dollar peg is becoming increasingly onerous for those emerging market (EM) countries that peg their currencies to the dollar – especially for those countries that export oil – several will need to devalue. Declining EM growth and deflated commodity prices have triggered excessive foreign reserve selling to maintain currency support. At some point, those EM countries will cry uncle (Uncle Sam) and admit defeat, especially as oil prices continue to decline. Reserve managers and sovereign wealth funds are already selling assets to alleviate increasingly stretched fiscal budgets.

PETRODOLLARS SHIFT COURSE: Decades of petrodollars flowing into capital assets are over; GMO, get me out!, they are yelling.

  • All oil producing countries pegged to the dollar are at strong risk of unpegging and having their currencies significantly depreciate
    • Kazakhstan abandoned the tenge’s peg to the dollar last August
    • Azerbaijan unpegged the manat on Dec 21, 2015
  • Saudi Arabia’s budget was built around +$100/barrel oil, and faces severe hardship under $50, let alone under $40, $30, or lower.
  • The Venezuelan bolivar, Angolan kwanza, Kuwaiti dinar, UAE dirham, Qatari riyal, and Algerian dinar are also oil producing currencies at risk of unpegging

How desperate must Saudi Arabia feel to float a public offering of Aramco now? They should have done that a couple years ago when oil was high. What investor in their right mind would pay much for a national oil company now, especially one that is under a strong government thumb and hell bent on selling oil at a loss?

HONG KONG DOLLAR? Although seemingly inconceivable, the strong Hong Kong (HK) dollar peg may not be infallible in the face of a rising Dollar and declining Yuan. The aggregate balance of HK’s banking system has more than doubled since mid-2014. HK tourism is dependent on the Chinese and thus must remain relatively affordable, even as Chinese yuans are exchanged into HK assets as a safe haven.

OIL PAIN MAY BOOMERANG: As a side note, even though Saudi Arabia drove down oil to hurt the coffers of their enemy, Iran, in the long run, the Saudi’s may hurt themselves more. Iranians have grown accustomed to tough economic times. The people are hardened after living under sanctions, rationings, and restrictions for decades, whereas the Saudi populous has had it relatively easy, living off the largesse of oil surpluses. Therefore, any fiscal tightening from lower oil prices, on a relative basis, may be a more revolting shock to the Saudis than the Iranians; the Saudi monarchy may have to do some jockeying to appease its people.

NEXT STEPS: Expect more dollar pegged currencies to unpeg, especially currencies of oil exporters, and especially as oil stays low for longer. No dollar peg is sacred; we will see stress on even Hong Kong’s peg. The reversal of petrodollars out of capital assets will pressure prices down on all risk assets.


Michael Ashley Schulman, CFA
Managing Director
Hollencrest Capital Management

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