Ruble Ends Longest-Ever Rally as Locals Sell Ahead of Break

The ruble ended its longest-ever strengthening streak against the central bank’s target basket as companies sold the currency amid speculation it has gained too much before the Russian holiday break.

The currency snapped a 10-day advance against the dollar- euro basket, weakening 0.6 percent to 34.8055 versus the mechanism used by Bank Rossii since 2005 to limit swings in the ruble that disadvantage exporters. It dropped for the first day in seven against the dollar, ending the longest rally since July, and snapped seven days of gains against the euro.

The ruble has rebounded over the past two months as oil prices surged 10 percent and the central bank indicated it may raise Russia’s key interest rates, bolstering the appeal of ruble-denominated assets. Traders have become more bullish on the ruble in December, with the currency’s one-week risk- reversal rate -- the premium of put options over calls -- dropping to 0.75 percent, from 1.25 percent Nov. 30.

The ruble’s record run means that “technically it looks overbought now and a short-term correction is on the cards,” Denis Korshilov, head of foreign-exchange trading in Moscow at Citigroup Inc., said by e-mail today. Large Russian banks are “closing some ruble longs ahead of the long holidays,” he added, referring to the positions investors place on securities they expect to appreciate.

The ruble weakened 0.8 percent to 30.49 per dollar by the 5 p.m. close of trading in Moscow, the biggest drop since October. The currency’s relative strength index closed above 70 yesterday, a level that signals a security will decline, according to some technical analysts. The ruble slid 0.4 percent to 40.08 per euro today. The basket rate is calculated by multiplying the dollar-ruble rate by 0.55, the euro-ruble rate by 0.45, then adding them together.

New Year Holiday

Russia’s Micex exchange, which trades currency, stocks and local bonds, will be closed for the annual New Year holiday break from Dec. 31 to Jan. 10, spokesman Nikita Bekasov said last week.

While the ruble won’t trade in 2011 until Jan. 11, local lenders and companies are reducing their holdings of the currency to insure them against unexpected or large movements in the foreign-exchange markets over the Russian break, said Evgeny Gavrilenkov, chief economist in Moscow at Troika Dialog, Russia’s oldest investment bank.

Government efforts to spend the last of its ruble- denominated budget funds is also weakening the currency, Gavrilenkov added. Money supply may grow as much as 10 percent in December because of this spending, he said.

The ruble, which Bank Rossii aims to make a fully flexible currency by 2012, has weakened 0.7 percent against the dollar and jumped 7.7 percent versus the euro so far this year. It is the worst-performing emerging-market currency against the dollar today, according to Bloomberg data.

Outflows

The currency’s 3.4 percent slide in the third quarter versus the basket was spurred by Russian banks and companies investing offshore or converting their holdings into foreign currency, helping drive capital outflows to as much as $30 billion this year, Bank Rossii’s First Deputy Chairman Alexei Ulyukayev said today, according to Interfax. The central bank’s official forecast for 2010 outflows is $22 billion.

The ruble should resume its appreciation at the start of 2011 trading, according to both Citigroup’s Korshilov and Chris Weafer, chief strategist at Moscow-based UralSib Financial Corp. The currency will gain 0.9 percent to 34.50 against the basket by the end of the first quarter, according to the median estimate of five economists’ forecasts compiled by Bloomberg.

‘Increasing Pressure’

Oil, which has climbed 15 percent this year and traded near a 26-month high of $91.88 a barrel today, “should help sustain support for the ruble and Russian equities today,” Weafer wrote in an e-mail to clients today. “Currency traders believe that this rate of inflation is increasing pressure for an interest rate rise and that is one reason why the value of the ruble has been steadily rising recently.”

Oil, Russia’s chief export earner, fell 0.3 percent to $91.23 a barrel as of 10 a.m. in New York.

Traders are pricing in 0.87 percentage point of increases to Russia’s key interest rates in the next three months, the most since November last year, according to forward-rate agreements. Bank Rossii raised its deposit rate, the rate charged on ruble deposits held with the central bank, by a quarter-point on Dec. 24 amid concern “inflation risks” are increasing, according to a statement issued after the monetary policy review.

Russia’s dollar bonds due April 2020 rose for the first day this week, pushing the yield down 8 basis points to 5.04 percent. The yield on government ruble bonds maturing March 2016 fell 11 basis points to 7.55 percent, the lowest since Dec. 10.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

To contact the editor responsible for this story: Stephen Kirkland at skirkland@bloomberg.net

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