Ruble Advance Catapulting Emerging-Market Charge Is Under Threat

  • Currency's rally in 2016 seen excessive by some investors
  • UBS Wealth Management, Veles among those re-assessing ruble

The currency that until today was leading the strongest emerging-market rally in five years is running out of steam.

By just about every measure, the ruble looks like it will struggle to extend its 11 percent advance this year. Forecasters see it giving up more than half those gains by the end of next month. Options traders are more bearish on Russia’s currency than any peer apart from the Argentine peso. And even history is against it, with the ruble having fallen in May in nine of the past 12 years.

The reason asset managers from UBS Wealth Management to Moscow’s Veles Capital are reassessing the currency is their belief that a rebound in oil, the nation’s biggest source of foreign earnings, is topping out. The ruble weakened the most among its major peers on Wednesday when Russian markets re-opened after holidays.

“We’re not particularly confident that the rally in oil is sustainable in the short term, and a lot of strength in the ruble had to do with a recovery in oil prices,” said Jorge Mariscal, chief investment officer for emerging markets at the wealth management unit of UBS Group AG, which oversees $2 trillion. “You take profits when you feel that valuations no longer justify the trade.”

Pulling Out

Mariscal said his team exited bets on a stronger ruble two weeks ago and predicts a decline to 73 per dollar in three months, from 66.08 in Moscow on Wednesday. The median of 35 forecasts in a Bloomberg survey puts the currency 6 percent weaker at about 70 by mid-year.

The ruble’s not only the best performer among major emerging-market currencies this year after Brazil’s real, it’s the third-biggest gainer in the wider world. Before today’s slide, it topped every developing-nation peer except Zambia’s kwacha.

Its advance is quite a turnaround for a currency that sank to a record 85.999 per dollar on Jan. 21 -- a day after oil reached a 12-year low.

The commodity’s rebound, as concerns China’s economy is slowing abate, is spurring the ruble higher, too. But now oil prices are threatened from increasing speculation that shale-oil production will rebound and cap crude’s advance.

“A correction in the price of oil is overdue, and once the tide turns, we’ll see the ruble decline in the second half of May,” said Evgeny Shilenkov, head of trading at Veles Capital in Moscow. “Our traders are staying put for now."

Speculators’ Bets

Hedge funds and other large speculators have pared net wagers on a stronger ruble by 47 percent since they reached a one-year high of 5,142 in March, according to the Commodity Futures Trading Commission in Washington.

Not everyone’s pulling back. Stone Harbor Investment Partners LP piled into the ruble to benefit from its jump of about 25 percent from its record low and sees no reason to bail now.

The relatively high yields offered by Russian assets make for an “attractive return potential,” even if the ruble levels off, said Stuart Sclater-Booth, a money manager in New York at Stone Harbor, which oversees more than $40 billion. He’s been betting on gains in the currency since mid-February.

Guillermo Osses, the head of emerging-market debt strategies at an investment unit of Man Group Plc, said that investors must be prepared to ride out “interim corrections” and that the ruble remains “attractive” for long-term investors.

Expensive Hedge

Russia’s currency is, however, the second most-expensive among its peers to protect against declines over six months, with the premium on options to sell compared with contracts to buy at 4 percentage points, data compiled by Bloomberg show.

There’s speculation the Bank of Russia will step in to sell rubles to curb its gains, taking advantage of its strength to replenish the $90 billion or so of foreign reserves it burned through in 2014 as oil fell and sanctions imposed over the Ukraine incursion hit home.

And like most emerging-market currencies, the ruble is vulnerable to the adage “sell in May and go away” as traders close out positions before the northern-hemisphere summer-holiday period.

A Bloomberg index of 20 major developing-nation currencies climbed 5.2 percent in 2016 through yesterday, the best start to a year since it rose 5.6 percent in the same period of 2011. If it hadn’t been for the drop at the start of the new month, the gauge would be having its best performance since it started in 1993.

“The ruble has three potential threats in May: oil, a turnaround of capital flows and risks that the central bank will resume buying foreign currency for reserves," said Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow. “People will try to cut risk.”

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