Ruble's World-Highest Volatility Seen Getting Even More Extreme

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  • Deterioating outlook for oil will drive more price swings
  • Currency's projected 3-month volatility is the world's highest

Ruble traders are confronted by the most volatile currency in the world, and Goldman Sachs Group Inc. says they should prepare for even wilder trading.

Last week’s selloff in oil pushed the ruble beyond 61 per dollar for the first time since March, wiping out most of its 2015 gains. While the Russian currency had roller-coaster swings in the past year, it has been slow to reflect the recent worsening outlook for the price of crude, the country’s biggest export. That has increased the risk for more volatility, according to Andrew Matheny and Clemens Grafe, economists at Goldman Sachs in Moscow.

The ruble extended its July plunge to 10 percent after Russia’s central bank reduced its key interest rate on Friday for the fifth time this year. That came two days after the regulator said it suspended purchases to support the currency.

Projected price swings for the ruble over the next three months rose to 21 percent, the most among worldwide peers, data compiled by Bloomberg show. The rate cut, along with declining oil prices and international sanctions, may help drive even wider price swings in the ruble, said Daniel Hewitt, an economist at Barclays Plc in London.

“We had a selloff in December and January, now we have a new round,” Hewitt said by phone from London. “It’s clear that if oil goes lower, the ruble is going to be really weak. You stop foreign currency purchases, and then you lower rates, it’s inconsistent, it’s dangerous, it can be costly, and it certainly doesn’t help to decrease volatility.”

Projected Volatility

The ruble was the worst performer among the world’s major currencies last month, narrowing its rebound from a record low in December when the rout in Brent sent the currency in free fall, prompting a surprise rate hike to 17 percent from 10.5 percent, the largest single increase since 1998.

The ruble’s 120-day correlation with oil rose to 0.41 last week, near to highest level in two years, according to data compiled by Bloomberg.

“Given that foreign-exchange implied volatility remains relatively low, particularly as compared to December levels, we think these risks are likely under-priced,” Matheny and Grafe of Goldman Sachs said in a note on Thursday.

Fair Price

The ruble fell 1.7 percent to 62.76 on Monday, a five-month low. The currency lost 3.2 percent on Friday after the central bank lowered the one-week auction rate by 50 basis points to 11 percent. The currency, which rose the most in the world earlier this year, has tumbled 20 percent against the dollar since May when the the government started purchasing foreign currency to replenish reserves. Policy makers suspended a program of buying as much as $200 million daily following a five-day rout in the ruble through Tuesday that threatened to reignite inflation.

Price swings in the ruble are unlikely to mimic last year’s extremes when the ruble tumbled to as low as 80 against the dollar amid a collapse in oil prices and an economy deteriorating under sanctions led by the U.S. and European Union, according to Michael Ganske, the head of emerging markets at Rogge Global Partners Plc.

“Would volatility pick up sharply? It’s not a clear-cut case, and there is not enough news flow for that,” Ganske, who oversees $5 billion in bonds and foreign exchange as head of emerging markets at Rogge Global Partners Plc in London, said by phone. “The ruble became more of a buffer for a change in the economic environment, but a level of 50 rubles per dollar was over exaggerated and 60 seems more fair.” 

The halt on foreign exchange purchases can lead to less pressure on the ruble in the second half of this year, the central bank said on Friday.

Balancing Act

Oil fell 18 percent in July, the biggest monthly retreat in almost seven years, on speculation that increased OPEC supplies and threats to demand in China will prolong a global glut. Brent crude, the oil grade traders use to price Russia’s main export blend, slipped 3.2 percent to $50.52 a barrel on the London-based ICE Futures Europe exchange on Monday, down from a 2014 peak of $115.06.

Russia will endure a two-year economic contraction if crude prices remain at $60 through 2016, the central bank said in June.

Russia’s policy makers are balancing the need for lower borrowing costs to shore up the economy with moves to avoid another currency crisis as oil has resumed its price retreat, according to Win Thin, the New York-based global head of emerging-market strategy at Brown Brothers Harriman & Co.

“The oil price is a very important driver, and we see that the ruble and the commodity-linked currencies have done the worst,” Thin said by phone on Friday. “It’s the smallest cut of the five cuts; they are getting a little bit cautious, as they got cautious with the dollar purchase. They don’t want the ruble move to get out of hand, like we saw in December.”