Ruble Set to Strengthen on Free Float, Fiscal Cliff, BofA Says

The ruble will climb 1.5 percent against the central bank’s target euro-dollar basket by the end of next year as global growth concerns recede and Bank Rossii stops buying and selling currency to manage the exchange rate, according to Bank of America Merrill Lynch.

The ruble is “very attractive in terms of fundamentals,” David Hauner, head of fixed-income strategy for emerging Europe, the Middle East and Africa, said in an interview in London yesterday.

Russia, the world’s largest energy exporter, will expand 3.5 percent this year, according to the Economy Ministry. The nation’s debt is set to reach 11 percent of gross domestic product this year, compared with 64 percent for Brazil, according to the International Monetary Fund. The ruble will be “one of the top beneficiaries” of improving risk appetite if the so-called fiscal cliff of automatic spending cuts and tax increases in the U.S. is averted at year-end, Hauner said.

Bank Rossii is no longer targeting the ruble’s exchange rate, First Deputy Chairman Alexei Ulyukayev reiterated at a conference in Moscow on Oct. 2.

“Russia will allow more appreciation than other central banks,” Hauner said. “They need to show that they are serious” about the free float, he said.

Euroclear Boost

The ruble strengthened 0.7 percent to 30.7050 per dollar by 4:59 p.m. in Moscow, the second day of gains. The currency rose 0.3 percent to 35.02 against the central bank’s euro-dollar target basket. The ruble will end the year little changed against the basket, Hauner forecast.

The ruble will also get a boost as Euroclear Bank SA begins servicing ruble-denominated government notes as early as December, expanding access to Russian debt markets. Foreign holdings of local-currency debt account for approximately 4 percent of the total, compared with more than 20 percent in Brazil, Mexico, South Africa or Poland, according to Hauner.

The Russian currency lost 3.9 percent in the last 6 months, lagging behind the Mexican peso which gained 2.3 percent. Brazil’s real lost 8.5 percent in the same period, according to data compiled by Bloomberg.

The ruble will benefit once we “get through the fiscal cliff,” Hauner said.“But it makes sense to start to build the position already before the end of the year.”

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