Photographer: JB Reed/Bloomberg

To See Where World’s Easy Money Is Going, Look at the Ruble

  • Ruble offers investors second-best carry returns this year
  • Options traders least pessimistic on currency since mid-2014

For an example of how the global clamor for yield is drowning out the risks in the world economy, look no further than Russia’s ruble.

Investor demand for higher returns has eclipsed a drop in oil prices and pushed the ruble’s correlation with crude to the lowest in a year. The currency of the world’s biggest energy exporter has turned from one of 2015’s five worst emerging-market performers to the third-best this year. Russia’s economy shrank 0.6 percent in the second quarter from a year earlier, the least since a contraction began at the start of 2015.

The future’s looking brighter, too, with options traders the least pessimistic on the ruble’s long-term prospects since mid-2014. Years of easy-money policies in developed economies have pushed yields below zero from Japan to Europe -- in stark contrast to Russia, whose 10.5 percent main rate makes it a popular destination for money borrowed cheaply elsewhere.

“The ruble is going to be one of the outperformers in the emerging markets,” said Saad Siddiqui, an analyst at JPMorgan Chase & Co., which topped Bloomberg’s latest currency rankings for Europe, the Middle East and Africa. “It offers one of the best carry trades.”

JPMorgan is predicting a 5 percent gain in the ruble to 61.36 per dollar by year-end, from 64.72 in Moscow on Friday. That contrasts with the 1 percent drop forecast in a Bloomberg survey of analysts.

Record Low

The ruble has rallied 14 percent this year, the best performance in emerging markets after the Brazilian real and the South African rand. That’s a turnaround from January, when collapsing crude prices pushed the currency to an all-time low of 85.999 per dollar.

The global rush to lock in yields helped the ruble buck a fresh bout of oil weakness this quarter. While Brent dropped 7 percent since June, the ruble is almost 1 percent stronger and carry traders have taken home a 21 percent return this year, the second-best after the real among 23 developing-nation peers. The ruble’s 30-day correlation with oil has fallen to 0.5, the lowest since June 2015, from as much as 0.9 in October. A reading of one would mean the two assets were in lockstep.

“Russia still has relatively attractive real interest rates vis à vis other investment destinations and the oil price is volatile, but on a small scale,” said Sergey Dergachev, a senior money manager at Union Investment Privatfonds GmbH in Frankfurt, which oversees about $13 billion. "The carry trade is really supportive for the ruble and other higher yielding currencies."

August Calamities

At the same time, Dergachev said the ruble still remains susceptible to risks including the flare-up in hostilities in Ukraine.

The currency has only gained against the dollar in August on three occasions since the collapse of the Soviet Union and the month has come to be associated with Russian catastrophes as well as the summer doldrums.

In August 1998 Boris Yeltsin’s government defaulted on its local debt and the currency collapsed almost 40 percent; August 2004 saw a spate of terror attacks culminating in the Beslan hostage-taking on Sept. 1; the Kursk nuclear submarine sank in August 2000, days after a fatal bomb blast in a Moscow underpass.

While options prices suggest traders are still more pessimistic on the ruble than any other emerging-market currency apart from the Turkish lira and South African rand, they’re rapidly shedding their pessimism.

The premium on contracts to sell the ruble versus the dollar in a year’s time, compared with options to buy, narrowed to 4.1 percentage points this week, the least since July 2014, data compiled by Bloomberg show. That’s down from more than 17 percentage points in January, when the ruble slumped to a record.

“In the current global environment with yields at a record low in developed economies, investors are looking for opportunities in the EM universe,” said Piotr Matys, a strategist at Rabobank in London. “High yielders are at the top of their list.”

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