Ruble Extends Monthly Retreat as Fed Risk Eclipses Oil Near $50

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  • Currency trims biggest rally in emerging markets this year
  • Rabobank recommends investors position for further weakness

The ruble weakened, extending its first monthly drop since January, as looming U.S. interest-rate increases dimmed the appeal of riskier emerging-market assets and outweighed the benefit of a rebound in oil on Russia’s economy.

The currency of the world’s biggest energy exporter lost 0.6 percent to 66.134 per dollar by 6:30 p.m. in Moscow, extending its drop in May to 2.3 percent. The Micex Index of stocks fell 1.7 percent to 1,902.76, the first decline in six days, while five-year government bonds fell, lifting the yield one basis point to a one-month high of 9.23 percent.

As odds for the Federal Reserve to increase borrowing costs in June or July more than doubled during the month, investors pulled money out of higher-yielding assets including the ruble, the best-performing emerging-market currency this year. That’s counteracted the benefit on Russia’s finances of a 3.7 percent rally in Brent crude to nearly $50 a barrel.

“The ruble is stuck in a relatively narrow range against the dollar as support coming from still fairly high oil prices is offset by market speculation that the Fed may raise interest rates in June,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. Forecasting the Fed will raise rates in June, Rabobank recommends positioning for a weaker ruble in the short-term.

The currency’s strength may prove unsustainable without further gains in crude, the central bank’s research and forecasting department said in a report published on Monday. The month of May often witnesses a depreciation in the currency, with data compiled by Bloomberg showing the ruble has posted monthly declines seven times during the past decade.

Even after underperforming oil in May, the currency’s 120-day correlation with the commodity that accounts for 60 percent of Russia’s exports along with natural gas was near a record high of 0.81 on Tuesday. A value of 1 would mean the assets are moving in lockstep. Brent traded at $49.97 a barrel on Tuesday.

“The ruble is indirectly vulnerable to Fed tightening should the latter lead to a decline in commodity prices and an interpretation that the global economy could suffer from higher U.S. funding costs,” Morgan Stanley analysts said in an e-mailed note, recommending to short the ruble against the dollar.