Ruble Carry Appeal Diminished as Volatility Offsets High Rates

  • Carry-to-risk ratio at lowest in a year as currency swings
  • Ruble climbs following steepest two-day drop in six months

The ruble rebounded from its biggest two-day rout since August as oil climbed, while ING Groep NV said the Russian currency’s swings are diminishing its carry-trade appeal.

The so-called carry-to-risk ratio, the central bank’s key rate divided by one-month implied ruble volatility, fell to 0.38, the lowest level since February 2015 on a closing basis. The ruble, the most volatile currency in emerging markets for the last three weeks, advanced 1.9 percent against the dollar to 78.239 by 5:19 p.m. in Moscow as Brent crude added 3.1 percent to $33.72 per barrel.

"Implied and historical volatility keep slowly climbing up, reflecting high uncertainty and eroding the ruble’s carry appeal," said Dmitry Polevoy, an economist at ING in Moscow. "High rates in Russia should support the currency, attracting speculative flows, but the high volatility undermines this support."

In a carry trade, investors borrow in a currency with low interest rates and invest where they are higher. At 11.96 percent, Russia’s three-month rates are the second-most among 22 emerging-markets countries tracked by Bloomberg. While the Bank of Russia kept its key one-week auction rate at 11 percent last month, it removed a reference to resuming an easing cycle in its accompanying statement, and said instead that policy makers will consider hoisting borrowing costs if inflationary pressures worsen.

The Micex Index of stocks rose for the first time in three days, adding 0.4 percent to 1,765. The yield on five-year government bonds dropped 11 basis points to 10.43 percent.

The Finance Ministry raised 8.27 billion rubles ($106 million) from the sale of inflation-linked bonds due August 2023 out of 12.1 billion rubles it offered at a weekly bond auction. It sold all 15 billion rubles of August 2021 bonds it offered, with demand of 60 billion rubles.

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