Kremlin Warning Daily on Ruble Gains Puts Currency Into Reverse

  • Putin aide says ruble has begun to ‘over-appreciate’
  • Bank of Russia says it won’t influence the exchange rate

Russia’s ruble headed for its lowest level in a week on speculation policy makers will shut down the currency’s gains as officials echoed a warning by President Vladimir Putin that its appreciation may have gone too far.

The ruble erased an advance at the start of trading and headed for a third daily loss after a Kremlin aide said the currency’s strength relative to oil prices endangers the budget and local companies’ competitiveness. The losses deepened even after the Bank of Russia said it’s committed to a free float and won’t influence the exchange rate. The fact that Putin sparked the debate could increase the possibility of a rate reduction when the central bank next meets, according to Union Bancaire Privee.

“President Putin’s comments may, at the margin, increase the chance of a cut," said Koon Chow, a London-based strategist at Union Bancaire, which oversees $112 billion in assets. “The central bank can successfully undermine the attractiveness of the ruble by cutting interest rates and intervening to buy dollars, to replenish the FX reserves.”

Putin spooked currency traders on Tuesday when he told his prime minister to monitor the ruble’s movement’s while the price of crude, Russia’s main export earner, remains volatile. According to a senior central banker, who wasn’t authorized to speak publicly on the matter and asked not to be identified, Putin’s comments were a call for vigilance on the part of the government, rather than a signal that monetary-policy action was imminent.

Policy makers will meet to determine the key rate next Friday, July 29. While economists forecast no change to the 10.5 percent rate, derivatives traders’ wagers for a cut in the next three months are near a six-week high, with forward-rate agreements signaling 59 basis points of reductions on Thursday.

The heightened attention comes after the ruble shrugged off a 5 percent decline in oil this month, strengthening 0.2 percent in the same period. The mismatch is bad news for Russia’s budget because it reduces the amount of rubles the government receives per barrel of oil sold abroad at a time when the deficit is running at its widest in more than half a decade.

The Russian currency traded 0.5 percent weaker at 64.0700 as of 5:41 p.m. in Moscow. Ten-year government bonds were little changed, lifting the yield one basis point to 8.55 percent, the highest level in almost a month. Brent crude was little changed at $47.16 a barrel.

The 60-day correlation between the ruble and oil has dropped to an almost one-year low, as tax and dividend payments outweigh crude’s decline in June. At current oil prices, the budget needs the ruble to trade no stronger than 65 to 70 versus the dollar, the Vedomosti newspaper reported today, citing unidentified government officials.

The flurry of statements from officials and the central bank points to a disagreement in the government over what’s best for the economy, according to Dmitri Petrov, an analyst at Nomura International Plc in London.

“There is some division between those who are quite convinced and trying to convince the president that the currency is overvalued and that this is bad for the economy, and those who are unsure about the net benefit of having weaker FX,” Petrov said.

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