Russian ruble in freefall, but USD/RUB expected to move back below 80.0 - UBS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 22, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Córdoba) - The Russian ruble (RUB) continues to depreciate, with USD/RUB reaching historic highs above 85.0 on Thursday. According to the UBS analyst team, the fall in oil prices is weighing on the Russian economy and the currency, but the latest moves are stronger than what would be implied by oil price moves alone. “Current levels bring us closer to our risk scenario of domestic deposits increasingly being exchanged into dollars”, UBS notes.

    Key Quotes

    “There are few options left to effectively ease the depreciation pressure amid falling oil prices, and policymakers are aware of the high cost of interventions. Bank of Russia governor Elvira Nabiullina said that the central bank will intervene only if it sees risks to financial market stability, but at this stage, the bank believes, these are not prevalent. Ultimately, much depends on an eventual stabilization of oil prices, and this remains uncertain in the current environment. In the near term, we therefore see a high likelihood of further bouts of RUB weakness, but reaffirm our view that USDRUB should move below 80.0 again as soon as market conditions moderate and oil prices stabilize. Our USDRUB forecasts are 73.0 in three months and 70.0 in six to 12 months.”

    “For this year and beyond, the price at which oil finds a new equilibrium is crucial. Russia's economy remains in recession, and current energy prices imply a sustained contraction. In 4Q15, a range of economic indicators, including industrial production and investment, stabilized somewhat. But this trend is not yet broad based and occurred only at weak levels. Near-term setbacks are likely. Also, fiscal constraints have increased, and the government is currently reviewing the budget for this year. Policymakers, as indicated by recent central bank decisions, are prudently assessing growth-inflation dynamics before resuming interest rate cuts. Although inflation has declined sharply (Dec: 12.9% y/y, prior: 15.0%), the weak ruble limits the scope for monetary easing for the time being.”

    “The next regular policy rate decision is to be announced on 29 January. The current rate of 11% keeps the currency attractive from an interest rate perspective, but weighs on the country's growth prospects. Over the past year, the ruble has taken on an increasingly important role as an external shock absorber for the Russian economy. This makes it more volatile, but also supports the external balance, as shown by the sound current account surplus that Russia runs."

    "Although current depressed oil prices appear temporary, market rebalancing takes time. Not only the excess supply needs to be factored in, but also subdued global growth, which is clouding demand prospects. We think stable to somewhat higher oil prices are realistic in the course of 2016.”
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