Ruble Halts 7-Day Slide as Faster Inflation Curbs Rate-Cut Bets

The ruble climbed for the first time in eight days against the dollar as investors pared wagers on interest-rate cuts after inflation accelerated to an almost three-year high.

The ruble strengthened 0.1 percent to 35.0390 per dollar by 6 p.m. in Moscow, when the central bank stops its market operations. It weakened to as low as 35.2500 earlier. Benchmark government bonds due February 2027 rose, lowering the yield two basis points to 8.67 percent.

The ruble failed to breach the 50-day moving average, which is close to 35.26 versus the dollar, and accelerated its rebound after the Federal Statistic Service said inflation accelerated to 7.6 percent in May, the fastest pace since August 2011. The ruble lost 2.6 percent in the seven previous sessions, the second-worst performance among 24 emerging-market currencies tracked by Bloomberg.

The inflation rate “cooled down those who might have expected a rate cut,” Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, said in e-mailed comments.

The Russian central bank forecasts inflation will decline to 6 percent by the end of the year. The regulator will probably leave the key one-week repo rate on hold at 7.5 percent at its next meeting after raising it 200 basis points since February, according to a Bloomberg survey of economists.

Ruble Carry

“The ruble gets support from the central bank’s concerns about the accelerating inflation,” Sergey Fishgoyt, deputy head of foreign exchange trading at OAO Bank Otkritie, said in e-mailed comments. “Carry trade is coming.”

In carry trades, investors borrow in countries where interest rates are low and invest the funds where rates are higher, which can boost the value of the local currency.

Economists surveyed by Bloomberg lowered their forecast for Russia’s economic growth in 2014 to 0.7 percent from 1 percent previously, the slowest pace since the contraction in 2009.

“We’re betting on the ruble weakening,” Alexei Tretyakov, chief executive officer at Aricapital Asset Management in Moscow, said in e-mailed comments. Dollar bonds and deposits now account for three-quarters of Tretyakov’s investments, he said.

“It’s hard to estimate the geopolitical risks, but in the economy we see the obvious deterioration of economic growth expectations, and on top of that the unexpected inflation acceleration,” Tretyakov said.

Bond Auction

The ruble advanced 0.1 percent against the euro to 47.7200 and strengthened 0.1 percent to 40.7455 against Bank Rossii’s target dollar-euro basket.

The Finance Ministry sold 7.5 billion rubles ($214 million) of August 2023 bonds at an 8.56 percent average yield in an auction today out of 10 billion rubles offered, it said. Total demand was 16 billion rubles. The ministry sold less than half the 10 billion rubles of debt offered at its previous auction on May 28.

“The Finance Ministry could’ve sold the whole thing, had it offered some more premium to the secondary market,” Polevoy from ING said. “Against the rising demand from foreigners there is some shortage of bonds in the market.”

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