The ruble capped its worst week in at least 11 years as the Russian central bank pledged its readiness to support a currency battered by oil’s slide and worsening tension in Ukraine’s east.
The ruble climbed 0.3 percent to 46.7070 per dollar at 7:53 p.m. in Moscow, trimming’s this week’s drop to 7.9 percent, the most since at least 2003. Ten-year government bonds declined for a third week, while wagers for interest-rate increases rose for the first time in eight days.
The central bank is “ready to increase foreign-currency interventions at any moment, as well as to use its other financial-market tools,” according to a statement released after the ruble slid as much as 3.7 percent to a record 48.6495. New fighting in Ukraine and Brent’s longest weekly retreat in 13 years have weighed on the nation’s assets since the Bank of Russia abandoned its currency-intervention policy on Nov. 5.
“The central bank has to say something, otherwise such a strong devaluation could turn into panic among the population,” Oleg Popov, who helps oversee $1 billion at Allianz Investments in Moscow, said by e-mail. “It’s hard to say whether this statement alone is sufficient.”
After tumbling to an all-time low for a third day, the currency rallied as much as 2.6 percent amid speculation policy makers were holding a special meeting, according to Citigroup Inc. and OAO Promsvyazbank said. It pared those gains after the central bank released its statement today.
Heightened demand for dollars in recent days “creates conditions for the formation of risks for financial stability,” the Bank of Russia said today. “The process of adapting the currency market to the new FX policy mechanism will take some more time. During this period, we could see volatility in the exchange rate.”
Sanctions curtailing access of Russian companies to dollar and euro debt markets have prompted companies and individuals to hoard dollars. The ruble’s three-month implied volatility, which reflects expectations of currency fluctuations, rose by 8.11 percentage points this week to a five-year high of 26.7 percent, according to data compiled by Bloomberg.
The central bank’s unexpected 150 basis-point interest-rate increase a week ago and changes this week to its intervention policy to ward off speculators has failed to shore up the ruble.
Policy makers need to increase borrowing costs by another 300 to 500 basis points and/or massively and unpredictably intervene in the currency market to arrest the drop, Ivan Tchakarov, economist at Citigroup in Moscow, said in an e-mailed note today.
Wagers for rate increases in the next three months rose to 88 basis points today from 69 basis points yesterday, according to data compiled by Bloomberg.
While canceling its predictable intervention mechanism two days ago, the central bank included a caveat reserving the right to sell foreign currency unannounced if it deems there’s a threat to the nation’s financial stability.
Under the new rules, it spends $350 million just once a day to support the ruble when it falls past its lower trading band. Previously, it sold $350 million each time the ruble fell by 5 kopeks past the boundary before moving the band again and repeating the process, enabling speculators to profit from short positions betting on further drops.
Russia has drained $83 billion of its foreign-exchange reserves this year to slow the ruble’s depreciation after the annexation of Ukraine’s Crimea peninsula in March sparked a standoff with the U.S. and European Union. The cash pile stood at a five-year low of $428.6 billion on Oct. 31.
Oil, the source of about half of Russia’s budget revenue along with gas, has retreated 28 percent since a 2014 peak in June. Escalating tension in Ukraine has also hurt the ruble since Ukraine and its allies accused separatists of undermining peace efforts with Nov. 2 elections in Donetsk and Luhansk.
Ukraine’s military said its forces killed as many as 200 rebels in fighting in Donetsk as dozens of tanks and other military vehicles crossed the border into Ukraine from Russia.
“The market is very jittery now and it responds to any rumors, speculations,” Ivan Tchakarov, the chief economist at Citigroup in Moscow, said by e-mail. “I don’t think what we have been seeing the last couple of days can in any way be linked to market fundamentals.”