The ruble climbed to its strongest level in almost a month against the dollar and gained versus the euro as investors shunned European assets for the prospect of higher Russian returns.
The country’s currency surged 0.5 percent to 30.91 per dollar, the strongest since Nov. 13, and jumped 0.4 percent to 40.9625 per euro by the 5 p.m. close in Moscow. Those movements left the ruble 0.5 percent stronger at 35.4336 versus the target dollar-euro basket used by the country’s central bank to limit exchange-rate swings that hurt exporters.
Bank Rossii isn’t “afraid” of a stronger ruble and will use interest rates to curb inflation that will exceed the government’s 8 percent target by 0.4 percentage points this year, Chairman Sergei Ignatiev told reporters in Moscow yesterday. Fitch Ratings downgraded Ireland’s credit rating to BBB+ from A+ today, sending the euro 0.4 percent lower against the greenback. The price of oil, Russia’s chief export earner, also gained today by as much as 1.3 percent to $89.42 a barrel in New York.
“Oil prices moving higher and growing domestic concerns over inflation, which will lead to hiking policy rates” are supportive of the ruble,” Peter Rosenstreich, chief market analyst at ACM Advanced Currency Markets, said by phone from Geneva.
The Moscow-based central bank may raise its key interest rates in the first quarter of next year, Ignatiev said yesterday. The first increase to Russia’s refinancing, repurchase and deposit rates since November 2008 would bolster the ruble’s appeal as a target for the carry trade, where investors borrow funds in countries where interest rates are lower and then invest the money where the returns are higher.
Russia’s key rates are at record lows, after 14 cuts between April 2009 and May this year as Bank Rossii tried to bolster the banking sector and lending amid the global credit crisis. With the inflation rate hitting 8.1 percent in November, the highest monthly level since December last year, the central bank “will probably consider” raising rates at its review Dec. 24, Citigroup Inc. economists Elina Ribakova and Natalia Novikova wrote in a research note e-mailed today.
Outflows of capital reached $29 billion in the 11 months to the end of November, more than the central bank’s full-year forecast for $22 billion of outflows, Ignatiev said yesterday. The regulator is also willing to accept ruble appreciation because a weaker currency stokes inflation, according to the Citigroup note. A strengthening ruble reduces prices on imported goods, helping temper inflation.
The central bank’s more “hawkish” position on rates is aimed more at bolstering the ruble and not curbing inflation, according to Aleksandra Evtifyeva, an economist at VTB Capital, the investment banking arm of Russia’s second-largest bank.
Russia’s central bank removed the qualifier “for the coming months” when it kept rates on hold Nov. 26, giving it a “free hand” to start raising borrowing costs, First Deputy Chairman Alexei Ulyukayev said at a conference in Munich Nov. 29. The ruble slumped 2.2 percent against the dollar last month, the biggest monthly drop since May, amid speculation Russian banks and companies are seeking out foreign currency for acquisitions and to repay debt denominated in dollars and euros.
“We treat the central bank’s comments of the past two weeks as verbal interventions against capital outflows and ruble depreciation,” Evtifyeva wrote in an e-mail to clients today. “Rapid ruble depreciation might hurt consumer demand, as the savings rate would increase, and the inflation outlook.”
$5.6 Billion Sold
Bank Rossii keeps the ruble within a so-called “floating corridor” against the basket by buying and selling dollars and euros on the currency market. The bank sold a net $5.6 billion of foreign currency last month to shore up the ruble, the biggest monthly amount of sales since January 2009, central bank data shows. While Citigroup traders estimate the regulator is selling about $150 million a day, Ulyukayev said yesterday interventions had been reduced this month, according to the RIA Novosti news service.
Russia’s foreign currency reserves dropped by $3.1 billion to $481.5 billion last week, the lowest since the second-to-last week of September, according to Bank Rossii data published today. It was the fourth straight week of declines in the stockpile, the longest run of drops since November 2008, when the central bank was selling dollars and euros from the reserves to engineer its so-called “gradual devaluation” of the ruble during the credit crisis. It is still the world’s largest after China and Japan’s reserves.
The ruble is next commodity-linked currency to watch and investors should put so-called long positions on it against both the basket and the Australian dollar from the beginning of next year, RBC Capital Markets analysts wrote in a note on the bank’s top currency trades for 2011 e-mailed today. The Australian dollar has already surged 10 percent against the dollar this year and it’s the ruble’s turn next, Robert Beange, RBC capital’s head of emerging markets strategy, said by e-mail today.
The ruble weakened 0.4 percent to 30.5266 per Australian dollar today. It’s lost 12 percent versus the South Pacific currency, known as the Aussie, this year.
Russia’s dollar bonds due 2020 rose for the first day this week, pushing the yield down 9 basis points to 4.839 percent. The yield on government ruble bonds maturing 2016 was unchanged at 7.31 percent.
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