The Russian Ruble has impressed and puzzled the markets over the past couple of months with its rise against the US dollar and the Euro. Yesterday morning Russian economists and politicians praised the national currency for its continued appreciation against the USD and the EUR – it has been going up for 9 weeks in a row.
And yet, later on Friday, the Ruble’s position shattered, with the dollar and the euro paring some of the losses against the Russian currency. The move seemed to be prompted by a decision by the Bank of Russia to raise the minimum interest rates at auctions to provide foreign currency rather than by any marked change in the price of crude oil.
Given this development, it is natural to ask whether the Russian Ruble rise is here to stay. Could the events from late Friday signify the end to the Ruble rebound?
We need to examine the factors underlying the Ruble stabilization since early February 2015.
Crude Oil
First off, it is natural to look at the prices of crude oil, the most important Russian export product. And here is the dazzling part: whereas crude oil prices have fluctuated since the start of February, the USD/RUB rate has been steadily down.
Brent prices for the last three months. Photo credit: NASDAQ.
USD/RUB prices for the last three months. Photo credit: BarChart.
The latest example comes from April 8, 2015, when Brent crude lost nearly $3 per barrel, whereas the Ruble simply kept strengthening against the US dollar.
The conclusion here is not that the price of the USD/RUB has suddenly become independent of the price of crude oil. For the past months, however, the two trading instruments have been less correlated than usually. An important factor is that since March the price of crude oil has been hovering in a certain range, not falling below a certain level, which seems to be supporting the Ruble. We have to bear in mind, that Bank of Russia has its policy in place for oil prices in the range $50-$55 per barrel (that is the basic scenario, with higher oil prices welcomed, of course).
External Debt
A very important factor to consider is the size of Russia’s external debt payments. According to data from Russia’s Ministry of Economic Development, the country paid off $60 billion of its external debt during the December 2014 – March 2015 period. This is the peak moment for debt payments, with the amount due in the coming months being way lower. Russian companies stand to pay $5.24 billion and $4.88 billion in April and May 2015, respectively, in order to cover external debts.
So, the perspectives in this respect are rather rosy for the Ruble. This has been highlighted as a factor for Russian Ruble strengthening in a recent statement by Bank of Russia’s head Elvira Nabiullina too.
Carry Trade
Elvira Nabiullina, however, has played down the role of speculators and carry trade for the appreciation of the Russian currency. It is a factor we cannot so easily dismiss, however, given what happened late on Friday. Carry trade is directly dependent on the interest rates at auctions to provide foreign currency. A rise in these rates is known to put off speculators from selling foreign currency, as the return rate for them will get smaller. A minor rise on Friday saw the Ruble lose positions against the US dollar, signalling that the role of speculators and carry trade should not be underestimated.
To summarize, let’s enlist the reasons for an eventual halt to the recent rise of the Ruble:
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A sharp fall in crude oil prices, that is, below and outside of the range seen during the past month or so.
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A reduction of key interest rates by the Bank of Russia. The next meeting set to produce a decision on the rates is near – April 30, 2015.
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A further rise in minimum interest rates at auctions to provide foreign currency. This has to be quite more drastic than the move we saw on Friday, in order to dissuade a bigger number of speculators from carry trade.
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Seasonal factors, like holidays. The May holidays usually prompt speculators to “stick to foreign currency” and to avoid selling it.
Of course, it remains an open question on whether the USD/RUB rise we witnessed on Friday will continue or whether the Ruble will succeed to keep up with its upward trajectory. The factors are numerous and complex, with traditional indicators now out of the picture or playing a smaller part in determining the direction of currency price moves. Just another piece of proof that the Forex market is quite dynamic.