Ruble Rallies as Global Stimulus Bolsters Carry Trade Appeal

  • Currency offers second-best carry return among peers in 2016
  • Bonds set for second weekly gain as investors chase yields

The ruble strengthened, headed for its first week of gains in three, as optimism global central banks will keep the cost of money low boosted the allure of a currency that’s offered the second-best carry trade in emerging markets this year.

Russia’s currency gained 0.8 percent to 65.290 per dollar by 5:31 p.m. in Moscow, bringing its advance over five days to 1.1 percent. Traders who borrowed in dollars to invest in ruble-denominated securities have taken home almost 20 percent this year, the most after Brazil among 23 developing countries tracked by Bloomberg. Government bonds also attracted buyers for a second week, sending yields on 10-year debt down six basis points to 8.45 percent.

Assets of the world’s largest energy exporter have emerged as one of the biggest beneficiaries of the bounce in oil prices back above $40 a barrel this week, while additional stimulus from Japan to the U.K. bolstered the appeal of high-yielding securities. By contrast, the Bank of Russia left its key rate unchanged at 10.5 percent on July 29, giving no clear indication of when monetary easing might resume.

"The general mood is still risk-on thanks to global central banks, who continue their super-loose monetary policy," Roman Dzugaev, a fixed-income trader at Bank Alexandrovsky PJSC in St. Petersburg, said by e-mail. "Russia is still a very appealing high-yield and carry trade destination thanks to the central bank’s conservative policy."

Strong U.S. payroll data, which gives the Federal Reserve more room to increase interest rates and diminishes the appeal of emerging-market assets, failed to stop the ruble’s rally on Friday.

After surging 6 percent in the previous two days, Brent crude traded 1.2 percent weaker at $43.76 per barrel on Friday. The MSCI Emerging Markets Currency Index climbed to a two-week high. The Micex Index of equities fell 0.6 percent to 1,933.98.

Emerging-markets equity funds attracted $1.6 billion in fresh inflows in the week to August 3, while developing-country bond funds added $2.1 billion, Renaissance Capital said in a research note.

While the risk-on mood helps the ruble, the next few days may dampen its strengthening as foreign minority shareholders of Russian gas giant Gazprom PJSC convert their newly-received dividends into foreign currency.

"We estimate that over $700 million could be converted into FX over the next few days following the completion of Gazprom’s annual dividend payments to minority shareholders," Sberbank CIB analysts Tom Levinson and Iskander Lutsko said in a research note.

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