Ruble Falls as Fed Signal Seen Limiting Bank of Russia Rate Cuts

  • RBS recommends ruble short position before policy meeting
  • Bonds trim second-best monthly rally in emerging markets

The ruble fell for the third time this week as the U.S. Federal Reserve signaled it may raise interest rates as soon as December, stoking speculation the Bank of Russia will choose to protect its currency by limiting the scale of its own policy easing.

Russia’s currency, on course for its worst week since early September, retreated 0.7 percent to 64.385 per dollar by 2:56 p.m. in Moscow. Royal Bank of Scotland Group Plc recommended investors favor the dollar over the ruble before Russian policy makers meet tomorrow to decide on interest rates. Half of the 38 analysts surveyed by Bloomberg, including RBS, are projecting a reduction to the 11 percent benchmark rate. The rest see no change.

“The central bank won’t have the courage for a bigger cut," said Yury Tulinov, the head of research at Societe Generale SA’s Rosbank PJSC unit in Moscow, who expects a half-point reduction on Friday. "The fear of the Fed is back as yesterday for the first time in a while the market got a hint that the Fed is hawkish."

‘Next Meeting’

Prospects for an earlier start to U.S. tightening increased after the Federal Open Market Committee dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed liftoff timing in a statement released Wednesday. For Russian policy makers, reducing borrowing costs too quickly at a time when the Fed is preparing to raise, threatens to exert downward pressure on the ruble and stoke inflation that’s almost four times above the central bank’s medium-term target.

Russian bonds fell for the second time this week on Thursday, pushing the yield up seven basis points to 10.14 percent. They’ve returned 10 percent this month, the most after Indonesia in the Bloomberg Emerging Market Local Sovereign Index.

"An initial knee-jerk reaction towards higher dollar-ruble seems likely" before the central bank meeting, Tatiana Orlova, an RBS economist covering Russia and central and eastern Europe, said in an e-mailed note. “Given that the market seems relatively well-prepared for a 50 basis point rate cut, we do not expect a lasting negative impact on the ruble if it materializes."

The Micex Index retreated 0.7 percent, led by Gazprom PJSC and Novatek PJSC. Gazprom was cut to neutral at Bank of America Corp., which expects it to continue losing the domestic market share and sees the company’s earnings reaching "a trough" in 2016, according to the e-mailed note. MegaFon PJSC jumped as much a 4.4 percent. Russia’s second-largest wireless carrier recommended distributing more dividends this year than initially planned as it increased a profitability target.

Market Vectors Russia ETF had $13.5 million outflows on Oct. 28, the most since Aug. 25, according to data compiled by Bloomberg.

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