What the US Midterms Mean for the Dollar, Oil and the Gulf

Host: As Americans get ready to vote, markets far beyond Wall Street are watching closely, especially in the Gulf. The conflict in the Middle East has kept oil prices high, and investors in the region are watching how the election could shape US policy on trade and energy. Many analysts see Democrats winning the House as the most likely outcome, with the Senate a closer call. For the Gulf, the stakes go beyond politics. Currencies like the UAE dirham and the Saudi riyal are tied to the US dollar, and oil is priced in dollars. Here to break it down is Kevin Ford, FX and Macro Strategist at Convera. Kevin, welcome back.

Kevin Ford: Thanks, Johnny, for having me back.

Host: How are currency markets positioned heading into tomorrow, and what is already priced in for the dollar?

Kevin Ford: The dollar is going into the election in a reasonably strong position. US yields remain high, and markets already seem to expect some sort of divided government, as you were saying. The most likely outcome is that Democrats take at least one chamber of Congress, which would limit the administration's ability to push through more tax cuts or spending. But because markets are already leaning that way, I do not think the result would necessarily produce a large move in the dollar. We could see some initial dollar weakness, particularly if Treasury yields fall, but the question is whether that move lasts, and honestly I am not convinced it would. The less likely outcome is a Republican sweep. The odds are very low right now. That would leave the administration with much more room on fiscal policy, tariffs and trade policy, which could push Treasury yields and the dollar higher. Then there is the positioning on the other side. I think investors already hold around 35 billion in net dollar longs, so it is a fairly crowded trade. That means even a modest surprise could produce a large move as investors adjust those positions.

Host: Oil is priced in dollars. How could the election results affect oil prices, and what does that mean for Gulf economies that depend on energy revenue?

Kevin Ford: The election could affect oil in two ways: through the dollar and through US policy in the Middle East. A weaker dollar would usually give oil some support because it makes crude, basically Brent, cheaper for buyers outside the US. But right now the bigger issue is what the result means for US policy towards Iran and the risk of further disruption around the Strait of Hormuz. If the administration comes out of the election with more room to continue its current approach, I think the market could add to the geopolitical premium in oil. If we end up with a divided Congress, markets may see somewhat less room for further escalation, although that would not mean an immediate change in US policy. It would take time. For the Gulf economies, higher oil prices clearly bring in more revenue and better terms of trade. Brent is around $118 a barrel, which is well above Saudi Arabia's estimated fiscal breakeven of roughly 80 to 85. The question is how much of that revenue can be treated as lasting revenue. If the market still expects the current disruption to ease, you would see some stabilisation in the oil market, which makes the current increase in revenue still valuable, and governments will probably remain cautious when planning beyond next year. So there is a short term, tactical view and a more strategic, long term planning view, and I think what comes out of this week will help shape the long term view for the Gulf governments.

Host: Gulf central banks usually follow the Fed because of the currency pegs. With a possible Fed rate hike in December, what does that mean for borrowing costs in the Gulf?

Kevin Ford: The currency pegs provide a lot of stability, but they also mean Gulf central banks have very limited room to move away from whatever the Fed does. If the Fed raises rates in December, as is expected right now, most Gulf central banks would probably follow quite quickly. If they did not, the gap between US and local interest rates could encourage investors to move money into dollars, which could eventually put pressure on the banks, and you do not want that. Borrowing costs are already high. The three month Saudi interbank rate is around 5.5%, and the UAE equivalent is about 4.3%. Another Fed hike feeds into corporate loans, mortgages and project finance, particularly anything with a floating rate. Governments can manage those costs more easily while oil revenue remains strong, but it becomes more difficult for private companies, especially property developers, infrastructure projects and firms that need to finance over very long terms. That is the difficult part for the region right now. Local conditions might justify a lower rate environment to support growth, but Gulf central banks cannot simply cut if the Fed is still moving in the other direction.

Host: Last question. For businesses trading between the US and the Gulf, how should they protect themselves from currency and oil swings this week?

Kevin Ford: The first thing businesses need to do is work out where the risk actually sits. If a US company is trading directly with a Gulf country whose currency is pegged to the dollar, the immediate FX risk may be quite small, but that does not mean the business has no exposure. The risk may come through European or Asian suppliers, so it is important to understand where the risk actually sits. The same applies to oil. Hedging is an important part of managing expected cost or revenue, rather than just trying to call the top or bottom of the market. I would monitor what oil markets are doing and what rates are doing, especially at the long end, and see what happens after the midterms. It is not just about the midterms this week, but also what happens by the end of the week when we get the payrolls, and more data coming from the US will definitely have an impact on markets.

Host: Kevin, thank you again for joining us this morning here on Capital Markets.

Kevin Ford: Thank you, Johny. Have a good day.