It has been a wild ride for the Russian ruble over the last 18 months. USD/RUB fell as much as 35% between January 2016 and April 2017 before stabilising at between 56 and 58 ruble per US dollar. The sharp appreciation was mostly driven by the recovery in crude oil prices, easing political tensions on the geopolitical level and a tight monetary policy.
Over the same period, crude oil prices recovered from the massive debasement of 2014-2015 as a barrel of Brent rose from $27.10 to above $50, giving the ruble a boost. Indeed, the Russian currency has always been heavily correlated to crude oil prices as Russia stands amongst the main producers of black gold. However, this strong relation has weakened recently: crude oil price came under renewed downside pressures following supply glut fears and concerns over the sustainability of the OPEC output deal while the ruble held steady.
One of the reasons that could explain this deviation from this long-term relationship is the tight monetary policy adopted by the central bank. Elvira Nabiullina, the CBR’s president, held a restrictive monetary policy to bring inflation levels under control. Yet both the core and headline measures, currently standing at 3.8% y/y and 4.10% y/y respectively, are close to the institution’s target of 4%. Therefore, the CBR will accelerate the rate cut pace that will give a breath of fresh air to the economy but also allow the ruble to depreciate. Indeed, carry traders will lose interest in the ruble and continue to search for higher yields somewhere else.
All in all, we think that both the re-correlation with crude oil and a looser monetary policy will translate into a weaker ruble. We target the 60 resistance level in USD/RUB in the medium-term.
By Arnaud Masset
