Oil Play Reborn as Trump Trade Shows Ruble Swept Up in Politics

The ruble, we hardly knew you.

The currency is growing unrecognizable after casting off its close link with oil, Russia’s chief export, and turning into a proxy for political risk. Becoming less beholden to crude has meant it’s ever more sensitive to shifts in capital flows and investor sentiment.

The most recent example was on Wednesday, when the ruble got caught up in the crossfire of headlines, including U.S. President Donald Trump’s tweet that his predecessor Barack Obama may have been “too soft” on Russia. That helped end five days of gains and sank the Russian currency by as much as 1.4 percent. Two weeks earlier, it surged to the strongest level in 18 months after the U.S. amended cyber-security sanctions against Russia.

“The ruble is really sensitive to such flashy political comments,” said Oleg Popov, a money manager who oversees $300 million of assets at April Capital in Moscow. “We’re going to continue seeing these sharp short-term ruble swings.”

With the central bank more than two years into its free-float and not getting in the way of the ruble, the politics of the moment increasingly keeps investors on hair-trigger alert. That’s giving greater sway to capital flows in determining the exchange rate and breaking its dependence on oil.

The ruble’s correlation with oil is down to the lowest level since 2015. Its one-year implied volatility versus the dollar is at 13 percent, vying for the fifth highest in emerging markets with Mexico’s peso, a currency famously victimized by Trump’s bluster.

The central bank’s “moderately tight” stance has also stoked the ruble’s appeal as a carry-trade, when investors borrow where rates are low and invest in higher-yielding assets. Russia’s 10 percent benchmark rate has delivered the highest carry returns this year among its peers.

Calming Ruble

Authorities are taking steps to rein in the volatility, which is already down by more than half from a year ago. The Finance Ministry has started purchases of foreign currency this month in an effort to further isolate the exchange rate from the fluctuations in the price of oil.

The possibility that the government will undertake additional measures is adding to the tempest around the ruble, with President Vladimir Putin or his close associates occasionally raising questions about the exchange rate.

On Friday, the ruble slid as much as 1.3 percent against the dollar, leading declines among emerging markets, after Economy Minister Maxim Oreshkin told Putin that the currency’s appreciation was short-term and that it will depreciate soon, according to Interfax

“While the carry trade continues to play in the ruble’s favor, such factors as verbal interventions from the president’s office and political headlines from the U.S. clearly add gap risk to the FX,” said Dmitri Petrov, a strategist at Nomura International Plc in London, referring to the risk that an asset’s price will rapidly change from one level to another with no trading in between. “Hot capital flows have become a more dominant driver.”

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