Bad Boy Ruble Turns Star Currency for Fans of Russia Carry Trade

Updated on
  • Citigroup, Commerzbank recommend trade and go overweight OFZs
  • Russia local currency bonds offer yields second only to Brazil

The recovery in Russian asset prices is rekindling interest in what was the world’s top carry trade strategy in the first half, and Citigroup Inc. and Commerzbank AG say there are more gains to come.

Russia was the top destination for carry traders who borrow in dollars to buy higher-yielding debt, earning 8.2 percent in the past month, according to data compiled by Bloomberg. The ruble’s 7.1 percent gain is also the best among emerging-market currencies in the period, after slumping more than twice as much in the third quarter.

Ruble volatility has eased as a truce between pro-Russian insurgents and government troops in neighboring Ukraine holds and oil prices stabilize. The appeal of the trade has also been bolstered by speculation the Federal Reserve will hold off raising interest rates until next year, which has helped spur gains across emerging markets this month.

“It’s the combination of external appetite toward emerging-market risk and small, but still noticeable, improvements in the geopolitical backdrop," said Evgeny Koshelev, an analyst at Rosbank, Societe Generale SA’s Moscow-based subsidiary. “The lower currency volatility has increased the appeal of a carry strategy,” though the “short-term appeal of the trade looks weak,” he said.

A measure of three-month implied volatility in the ruble fell to the lowest since August, at 21.3 percent.

Citigroup started recommending an overweight position on ruble bonds Sept. 22 and advises international clients to consider them as part of a carry-trade strategy. At an average 10 percent, local Russian government debt offers the highest yields after Brazil among emerging markets tracked by Bloomberg. OFZs, as they are called, gained 5.9 percent in the past month, trailing only Nigerian government bonds in a Bank of America Merrill Lynch index. Commerzbank raised the securities to overweight from underweight Oct. 9, citing the reduced tension in Ukraine.

“Short-term calming in eastern Ukraine could lead to some positive impulses out of the EU on the sanctions front,” said Simon Quijano-Evans, chief emerging-market strategist at Commerzbank in London.

The bullish statements contrast with the third quarter, when a renewed selloff in oil and a slowdown in China, Russia’s biggest trading partner, sent the ruble tumbling 15 percent and triggered a loss of 13 percent for carry traders in the ruble.

Tiptoeing Back

A cease-fire in Ukraine has held since February, helping to mend sentiment among investors who had fled Russia after it annexed Crimea in March last year and was subsequently slapped with sanctions. Pablo Goldberg, a money manager at BlackRock Inc., said on Bloomberg TV last week that he’s resumed buying Russian assets because politics is having less of an influence on investments.

Although Ukraine is quieter, traders are keeping an eye on Russia’s involvement in Syria. The ruble dropped as much as 1.2 percent on Friday after Turkey shot down an unidentified aircraft on the Syrian border, prompting concern it may have been a Russian plane. Until then, investors in Russia had looked past President Vladimir Putin’s decision to join the fighting last month to support the regime of President Bashar al-Assad.

The ruble may also be vulnerable to rising volatility around Oct. 30, when the Bank of Russia next decides on rates. After paring last year’s emergency increase with six percentage points of cuts since January -- bringing the benchmark to 11 percent -- policy makers will lower borrowing costs by another 50 basis points in the fourth quarter, according to the median forecast of 30 economists surveyed by Bloomberg.

Citigroup analysts said the central bank’s approach to easing will be gradual, keeping the Russian carry trade alive. It earned investors 18 percent in the first half, compared with 4 percent for the next-best currency, the Argentine peso.

"Ruble risk may trade well over the next couple of months," Luis Costa, chief fixed-income strategist for Central and Eastern Europe, the Middle East and Africa at Citigroup in London, said in e-mailed comments. "The Bank of Russia will cut, but it will do so in a very cautious way, not damaging the perception of good carry cushion in the ruble.”

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