Fed on Collision Course With Ruble as World's Best Rally Fizzles

  • Tighter U.S. policy would erode ruble’s appeal as carry trade
  • Currency strength seen as risk for exporters by some officials

Odds of Fed Rate Hike at 90%

The American who’s more important to the ruble is turning out to be Janet Yellen, not Donald Trump.

With the Russian currency already going from best to worst among major peers in a matter of weeks, the increasing likelihood that the U.S. Federal Reserve will raise interest rates this month is set to deal another blow to the ruble by cutting into its appeal as a carry-trade. The ruble’s rally is “over-extended,” meaning it’s “time to take some profits,” said Credit Suisse Group AG’s senior adviser, Robert Parker.

The world’s biggest currency surge since early 2016 may have finally run its course now that a rebound in oil plateaued and the Finance Ministry started purchases of foreign exchange last month. The ruble’s strength has also set off alarms among government officials concerned that it makes exports less competitive.

“If we get a rate hike in March, the ruble could weaken further,” said Wolfgang Ernst, an analyst at Raiffeisen Bank International AG in Vienna. “It isn’t in the interests of Russian officials to have a strong ruble. They are more comfortable with a rate near 60.”

After surging about 16 percent in the three months since mid-November, the ruble “peaked” at 57 versus the dollar on Feb. 14, according to Ernst. Another factor working against it is the possibility of large foreign-currency outflows in March, which could boost domestic dollar rates to create a “more challenging backdrop,” according to Sberbank CIB.

Following three days of declines, the ruble depreciated below 59 on Friday for the first time since early February. With the Finance Ministry announcing plans to buy less foreign currency than last month, it reversed losses and traded little changed versus the dollar as of 2:10 p.m. in Moscow.

‘Fizzling Out’

“The rally is gradually fizzling out,” said Evgeny Koshelev, an analyst at Societe Generale SA’s Rosbank PJSC unit in Moscow. “March will be intense from the point of view of external factors -- the Fed’s tough rhetoric and unpleasant turns in the French presidential race may bring wary looks at the emerging markets.”

The Russian currency will weaken to near 60.2 versus the dollar in the second quarter, according to the median estimate of 47 economists in a Bloomberg survey. Many of those forecasts have yet to price in the possibility the Fed will tighten this month, when the Federal Open Market Committee meets March 14-15.

Investors are souring on Russian assets after riding the speculation that Trump’s shock election will help roll back sanctions imposed over the crisis in Ukraine. Officials in Moscow are now growing increasingly frustrated over the lack of progress with the U.S. 

Enter Yellen.

Fed Hike

The odds that the Fed will raise rates this month are growing after several officials signaled their willingness to increase borrowing costs, with Fed Governor Lael Brainard being the latest. Yellen, the chair of the U.S. central bank, is due to give an address on Friday in Chicago after her deputy Stanley Fischer speaks in New York.

Still, it may be too early to call the rally over, according to Danske Bank A/S and Bank of America Corp. The ruble isn’t “overvalued yet” and remains “an attractive carry-trade,” BofA’s Gabriele Foa said in a report.

The Bank of Russia has held its benchmark above inflation for more than a year, a period that saw only two rate cuts of 50 basis points each, even as the pace of price growth slowed almost by half to 5 percent.

With the Bank of Russia saying it may only resume easing in the second half, hawkish policy makers are “helping ruble bulls to stay calm,” according to Vladimir Miklashevsky, a senior strategist at Danske Bank in Helsinki.

“There’re upside risks for the ruble if on March 15 the Fed disappoints the markets,” Miklashevsky said. “If the Fed doesn’t hike, it will create a positive wave for the whole emerging-market universe, with the ruble on top due to its high carry attractiveness.”

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