Ruble Has Worst Day in 8 Weeks as End of Tax Support Shows Risks

  • Sberbank CIB sees risk for currency to weaken to 65 per dollar
  • Nine-week bond rally `somewhat excessive,' Promsvyazbank says

The ruble slid the most in eight weeks as the end of a tax-payment cycle curtailed demand for the local currency, leaving it vulnerable to declining oil prices and prospects for interest-rate cuts as soon as Friday.

The currency weakened 3 percent to 64.961 per dollar by 5:19 p.m. in Moscow, the steepest drop among 24 emerging-market peers tracked by Bloomberg. While oil, Russia’s main export earner, is on course for its second consecutive monthly loss, the ruble advanced 3.9 percent in October through yesterday in part due to demand from exporters who were swapping their dollar-denominated revenue to pay about 483 billion rubles ($7.54 billion) in taxes that were due by Monday.

By removing that support, the ruble is weakening to catch up with crude, according to VTB Capital. It may also be vulnerable as forward-rate agreements show traders expect the Bank of Russia to resume interest-rate cuts, possibly as soon as its next meeting on Friday. Central bank Governor Elvira Nabiullina is striving to balance the need for lower interest rates to lift the economy out of its first recession since 2009 without reigniting inflation, which has slowed since touching a 13-year high in March.

The ruble "has every chance of hitting 65 considering the likelihood of a further drop in the oil price and a rate cut this Friday," Sberbank CIB analysts, including Evgeny Gavrilenkov, said in a research note. After exporters sold a "significant volume" of foreign exchange to meet tax payments, "we are now seeing a sharp drop in sales," they said.

Brent crude, the grade used to price Russia’s main export blend, decreased 1.8 percent to $46.69 a barrel on Tuesday.

Rate Outlook

The rally that’s handed investors in Russian bonds the second-biggest returns in emerging markets this month also fizzled on Tuesday as yields on the government’s five-year debt climbed nine basis points from an 11-month low to 10.11 percent.

Prospects for the Bank of Russia to resume its easing cycle spurred nine weeks of gains in the nation’s bonds, which have returned 12 percent since Sept. 30, the most after Indonesia in the Bloomberg Emerging Market Local Sovereign Index. Economists surveyed by Bloomberg are split in their forecasts on what policy makers will decide on Friday, with 20 seeing a reduction and 18 predicting the Bank of Russia will keep the benchmark rate at 11 percent for a second meeting in a row.

FRAs show investors are betting borrowing costs will fall by 70 basis points in the next three months. 

‘Somewhat Excessive’

“The rally was in our view even somewhat excessive,” Dmitriy Gritskevich, an analyst at Promsvyazbank PJSC said. “The market has effectively priced in a 100 basis-point cut. There’s no room to grow from here.”

Russia’s inflation rate will decline to 12.9 percent to 13 percent by the end of the year, according to ING chief economist for Russia Dmitry Polevoy. It fell to 15.7 percent in September after touching as high as 16.9 percent in the first quarter. Consumer-price increases will probably slow to 9 percent by the end of March, according to the median estimate in a Bloomberg survey.

“The opinion is split,” said Olga Sterina, a senior fixed-income analyst at UralSib Capital, who expects a 50 basis-point reduction. “There are doubts whether the rate cut will be now or at the end of the year.”

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