Ruble Trades Closest to Oil Since 2013 as Rate Cuts Damp Allure

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The ruble’s movements are the closest to those of oil prices in 20 months as a series of Russian interest-rate cuts and central bank currency purchases damp its carry-trade appeal.

The Russian currency fell for a third day, losing 1.6 percent to 52.8 versus the dollar as of 7:02 p.m. in Moscow, the weakest since April 22. The correlation between changes in the ruble-dollar exchange rate and moves in the price of Brent rose to 36 percent, the most since September 2013, according to data compiled by Bloomberg.

“The ruble is now following the dollar’s move against other currencies and oil, which is also tracking the dollar,” Andrey Mishko, a foreign-currency trader at National Standard Bank in Moscow, said in e-mailed comments. “On top of that, the central bank is buying, making the overall market positioning long dollar.”

The ruble has pared its world-leading performance this year to 15 percent as oil fell from its peak and the dollar gained in anticipation of higher U.S. borrowing costs. The Bank of Russia’s 450 basis points of interest-rate decreases this year have made the ruble less appealing for the carry trade, when investors borrow where interest rates are low and invest in countries with higher-yielding assets.

Crude oil, Russia’s main export earner, was steady at $62.05 per barrel in London, below its May 6 high of $67.77. The price of a barrel in ruble terms was 3,277, or about 9 percent below the average for the last 12 months.

Rate Outlook

If the oil price stays at current levels, Mishko sees the ruble trading in the range of 51.5 to 53 rubles until the Federal Reserve publishes its next rate decision on June 17. The Bloomberg Dollar Spot Index, which tracks the U.S. currency’s moves against 10 major peers, has climbed 1.9 percent since May 21, the day before Fed Chair Janet Yellen said she expects to raise interest rates this year.

The “normalization” on the local currency market means the central bank will be less inclined to cut interest rates aggressively at its remaining rate meetings this year, according to UralSib Capital economist Irina Lebedeva.

The key rate has already been reduced to 12.5 percent from 17 at the start of 2015 and derivatives traders are pricing in 69 basis points of cuts in the next three months, the least since March 4. Borrowing in dollars to fund purchases of ruble debt has handed investors a loss of 1.3 percent this month, according to data compiled by Bloomberg.

“After rates were lowered in April, the carry trade stopped, the demand for the central bank’s foreign currency loans declined, as well as sales of currency on the local market,” Lebedeva said in e-mailed comments.

The yield on five-year government bonds rose 11 basis points to 10.96 percent, the highest since May 4 on a closing basis. The Micex Index of equities lost 0.2 percent to 1,657.62, while the dollar-denominated RTS Index fell 2.1 percent to 990.87, the lowest since April 8.

OAO Gazprom, which led the declines on the Micex, slid 1.1 percent. The nation’s biggest natural gas producer will probably see lower gains in Europe for at least four years as weaker oil prices and rising competition threaten to further cut company profits, a government forecast showed.

OAO Sberbank, the nation’s biggest lender, retreated 0.9 percent. Sberbank said first-quarter profit slid 58 percent as Russia’s biggest bank posted a drop in lending and increased provisions for bad loans amid the country’s economic slump.

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