Ruble Reaches 8-Day Low as Investors See May’s Rally Overdone

The ruble touched the lowest level in almost two weeks as investors bet recent gains weren’t justified amid continued clashes in eastern Ukraine.

The currency weakened 0.3 percent to 40.2970 against Bank Rossii’s target dollar-euro basket by 6 p.m. in Moscow, when the bank stops its market operations. That’s the lowest level since May 19 on a closing basis. The ruble fell 0.3 percent against the dollar, having gained 2.8 percent in May, the second-most among 24 emerging-nation peers tracked by Bloomberg.

Russian assets rallied before the May 25 presidential election in Ukraine as President Vladimir Putin pulled troops from the border and pledged to work with the winner, easing concern Russia could face tougher sanctions from the U.S. and Europe. Foreign Minister Sergei Lavrov called for “emergency” measures to halt the violence in the east after separatist militias suffered the heaviest casualties of the insurgency.

“The situation in south-eastern Ukraine and the uncertainty around the gas dispute with Russia remain the main tension points,” OAO Bank Zenit analyst Vladimir Evstifeev said in an e-mailed note today. “The situation doesn’t look dramatic for the ruble. However, in a three-month horizon the ruble doesn’t look appealing.”

The ruble’s 6.3 percent decline versus the dollar since September was triggered by the central bank’s efforts to switch from managing inflation and the exchange rate to focusing only on price growth. The bank lets the currency trade in a seven-ruble band around the target basket of dollars and euros, currently from 36.40 rubles to 43.40 rubles.

Capital Flight

Russia’s economy is improving, though the growth trend isn’t stable yet, and in April the economy expanded 1.1 in real terms compared with 0.8 percent in March, deputy Economy Minister Andrey Klepach said yesterday. Net capital outflows may have reached $5 billion to $8 billion in April, staying close to zero in May after a $50.6 billion outflow in the first quarter, Economy Minister Alexei Ulyukayev said today.

The outlook for capital flows and growth remains weak, and with improvements in the political environment more or less priced in, investors’ focus may shift to worsened fundamentals, Morgan Stanley analysts led by Rashique Rahman said in an e-mailed note. They are “medium-term bearish” on the ruble’s prospects, the analysts said.

Foreign Reserves

The central bank has spent $44.8 billion this year managing the ruble. On May 22 the regulator announced it was cutting the size of interventions within the corridor by $100 million a day to $100 million or $300 million depending on the level.

The central bank may use the ruble’s rebound to reduce its presence in the currency market, Goldman Sachs Group Inc. chief Russia economist Clemens Grafe said in a note to clients today.

“With this in mind, we continue to see some downside for the ruble in the coming months, while volatility is also likely to rise once more,” Grafe said. As the ruble now trades “well inside” the target corridor of the central bank, the regulator may take the next steps toward floating the currency, he said.

The yield on benchmark government bonds due February 2027 declined eight basis points to 8.79 percent today.

Goldman Sachs sees the Russian currency trading at 43 rubles per basket in three months, Grafe said, implying a 6.6 percent decline from current levels.

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