World’s Best Carry Trade Finds Unlikely Home as Ruble Rebounds

Carry traders who weren’t put off by Russia’s market turmoil last year are getting the world’s best deal in 2015.

Borrowing in dollars to fund purchases of ruble debt earned 9.6 percent since Jan. 1, exceeding the second-best currency, the Indian rupee, by more than three times. Even as bearish signals mount that the ruble’s 5.4 percent rally this year -- the biggest among 31 major currencies -- has gone too far, there’s scope for that trade to remain lucrative, according to Renaissance Capital and ING Groep NV.

The play came into favor as currency price swings, which pose the main threat to the carry wager, fell to four-month lows. A stabilization in oil prices after last year’s slump and the February cease-fire in eastern Ukraine allowed investors to focus on benchmark Russian interest rates of 14 percent, the third-highest in Europe, the Middle East and Africa.

“There’s still an upside to that trade,” Renaissance Chief Executive Officer Igor Vayn said in an interview in Moscow on Wednesday. “Domestic players were the first ones to get into that game. It makes sense that foreigners will become interested in this trade as well.”

In the Russian context, the carry trade has been riddled with risks in the past 12 months as sanctions over the conflict in Ukraine and oil’s 46 percent slump overshadowed six rate increases that drove the Bank of Russia’s benchmark to an 11-year high of 17 percent.

Guessing Game

Investors who bet on the ruble carry found themselves shouldering losses of 12 percent in the third quarter and 33 percent in the final three months of 2014, the worst performance globally.

While the Ukraine cease-fire is generally holding, government troops and separatist rebels have failed to demonstrate that they’ve withdrawn heavy weapons from the conflict zone, the Organization for Security and Cooperation in Europe said on Thursday.

“Russia turns on a dime in terms of politics,” Aleksei Belkin, the chief investment officer at Kapital Asset Management LLC, said by e-mail from Moscow on Wednesday. While representing one of the “juiciest” trades, betting on the ruble is equivalent to “crapshooting, a guessing game,” he said.

Bearish Signals

Even now, after one-month implied volatility for the Russian currency declined to 22 percent on Thursday from 72 percent at the end of last year, the measure of future swings remains the second-highest worldwide, according to data compiled by Bloomberg.

The ruble’s 14-day relative strength index was the closest since June to the threshold that signals to some investors an asset is overbought on Thursday. The currency was one of only five among 24 emerging-market peers to appreciate against the dollar this quarter, after sliding the most in the same group last year.

“The ruble has surprised even the optimists, the move was too swift,” Danske Bank A/S strategist Vladimir Miklashevsky, who most accurately predicted the currency’s performance last year, said by e-mail from Helsinki. “Prospects for the Russian economy this year don’t look rosy. The carry doesn’t look that appealing going forward.”

The key driver that could make or break the carry trade is oil, which comprises about 50 percent of Russia’s budget revenue together with natural gas. The ruble rallied as much as 2.5 percent on Thursday to its 2015 peak as Saudi Arabia bombed rebel positions in Yemen, stoking concern Middle East oil supplies will be disrupted and sending Brent crude to a two-week high. The currency weakened 0.5 percent against the dollar on Friday to 57.5990.

Not ‘Scary’

OAO MDM Bank last played the carry trade on March 20 when there was clear technical signal that the dollar would weaken against the ruble, Nikolay Zolotarev, the head of the investment department in Moscow, said by e-mail.

While the Bank of Russia has started unwinding the 11.5 percentage points of increases in 2014, benchmark borrowing costs will still be at 10.5 percent by year-end, according to the median estimate in a Bloomberg survey. Only Ukraine, Belarus and Moldova would have higher rates in Europe based on current levels, according to data compiled by Bloomberg.

“When the carry is high and volatility is declining it’s not that scary to stay in the ruble,” Dmitry Polevoy, the chief economist for Russia at ING Groep in Moscow, said by e-mail.

Before it's here, it's on the Bloomberg Terminal.