In early May, the ruble pushed the euro and dollar back below their key round levels: EURRUB dropped below 90, and USDRUB fell under 75. The weakening of the Russian currency in the last two days of April should be more connected with the traditional wariness of players before the May holidays – too often the financial markets of the Russian Federation were hit during the long weekend during the May or New Year holidays.
Ruble and oil
The latest rise in the ruble at the start of trading in May was accompanied by a 2% strengthening in oil and renewed 7-week highs by the Brent price. However, it is hardly news that the mechanism of the relationship between the oil price and the ruble exchange rate has become much less straightforward than in 2014, when the ruble often repeated oil dynamics almost one to one.
The weakening of the short-term connection does not at all negate the fact that in the medium term the ruble and oil go in the same direction. OPEC + maintains control over the resource supply, maintaining a positive momentum in prices. At the same time, quotas are gradually being raised, making the process of restoring normal life organized and helping Russian exporters to increase their revenues.
In our opinion, oil quotes corrected excessive overheating from the rally from November to March and, cautiously gaining strength in April, returned to an upward trend. Trading near $ 68.5 per barrel of Brent, oil is in the area of the highs of the last three years. In the coming months, we expect an update to the 2019 highs with Brent’s attempt at a $ 75 assault, reaching an operating range of $ 60-75 by the end of the year. This creates significant potential for ruble appreciation.
The Central Bank of the Russian Federation is ahead of everyone
It also benefits from the recent reversal of monetary policy by the Bank of Russia. An active increase in interest rates attracts buyers to ruble bonds due to an increase in their yield. Also, the ability to return to policy normalization is an important signal that the economy does not need extremely soft monetary policy to sustain growth.
The CBR’s reversal towards higher rates contrasts markedly with the policies of the ECB and the Fed, which continue to abundantly buy assets to their balance sheets and do not signal a policy reversal.
It cannot be ruled out that everything will change, and in the coming months the two largest Central Banks, and after them the rest, will proclaim a change in policy towards normalizing policy. With the growing appetite for risk in international markets, which we are seeing now, investors choose more profitable assets and agree to take more risky positions.
True, among the market risks, risks may appear that the central banks will show excessive agility, at once cutting off the supply of liquidity to the markets from all taps.
Risks to the ruble exchange rate
There are other risks as well. In recent days, we have seen a return of pressure on stock indices in China and the United States. However, in the first case, this is due to concerns about the strengthening of regulation in payment systems – a threat that does not yet hang over the Russian market. The dynamics of the US market is more likely due to the resumption of rotation from “growth stocks” to “value stocks”, that is, in companies with a stable business that regularly pay dividends. Tangentially, this supports the Russian market, where many companies from such sectors are moving in the same vein as their foreign counterparts.
Unsurprisingly, EURRUB and USDRUB are again close to falling out of the coronavirus trend. Anchoring under 90 and 75 and the ability to continue to receive support in the coming days should be viewed as an important signal of investor confidence in the ruble, which can quickly lead the dollar to the next test of local lows at 72.5, and the euro – below 88. A failure under them will potentially trigger a decline to 70 per dollar and 85 per euro by the middle of summer.
Read more forecasts for May in the 130th issue of Fortrader magazine.