The Ruble Rally May Be About to Reverse Course. Here's Why.

Updated on
  • Currency has climbed almost 13% in the past six months
  • ‘Time is right’ for a reversal, Societe Generale says

TD Bank's McCormick Sees the Ruble as an Oil Play

After clutching to the best gains among global peers, the ruble may have met its match.

Waning demand from foreign investors, falling oil prices and upcoming dividend payments pose downside risks to the Russian currency’s 13 percent advance in the past six months -- the strongest appreciation of 31 major currencies tracked by Bloomberg. Nomura Holdings Inc. and Societe Generale SA recommended selling the ruble in notes published this week, while Skandinaviska Enskilda Banken AB said it could drop 9 percent by the end of the year.

A reversal could hurt investors who loaded up on local-currency bonds at the fastest pace on record in the first quarter. The ruble retreated 0.3 percent on Friday, heading for its first weekly slide in almost a month, as Brent crude traded below $50 a barrel.

“All good things come to an end,” SocGen analysts including Yury Tulinov said in a note. “We believe that the time is right for at a least partial reversal of the appreciation trend for the ruble.”

These five indicators show why the ruble may be about to change direction:

1. An unnatural decoupling

Crude oil may have sunk almost 10 percent this year, but high demand from carry traders for the ruble saw it appreciate by the same proportion. The mismatch with Russia’s main export earner hurts the budget by reducing the amount of local currency the government collects from each barrel of oil sold for dollars abroad. At current levels, the average value of Brent in rubles is just below the minimum level stipulated in Russia’s budget, suggesting the ruble needs to weaken, according to Nomura.

2. More cuts are coming...

The central bank is under pressure to keep aggressively cutting interest rates as inflation moves closer to the lender’s target of 4 percent. The bank reduced the rate by 50 basis points to 9.25 percent at its last meeting after President Vladimir Putin said the government is searching for market-based measures to influence the currency. Bank of America Merrill Lynch and SocGen are both wagering on another 50 basis-point cut at the next meeting on June 16.

Read More: Carry Trade Defined, or Why Interest Rates Matter: QuickTake Q&A

3. ... and dividends too

Russian companies will pay a record 1.1 trillion rubles ($19.4 billion) in dividends this year and a bigger portion of that is likely to be converted into dollars than in the past, according to Iskander Lutsko, an analyst at Sberbank, the investment-banking arm of Russia’s biggest lender. While dividend payments usually support the ruble, this year is different because companies will hang on to their dollars before an uptick in debt payments and as the nation’s biggest oil producer closes an acquisition in India.

4. Demand for ruble bonds is falling

Appetite for the government’s local-currency debt is fading after foreign investors bought a record 288 billion rubles of the securities in the first quarter. In April, non-residents added just 15 billion rubles of the so-called OFZs, according to SocGen. The finance ministry has failed to place all of the bonds offered at three consecutive weekly auctions.

The weak results point to a “saturation of demand” from international investors, SocGen said. Analysts at Morgan Stanley disagree, saying in a research note on Friday that the positive backdrop for emerging-market assets will continue to buoy demand for the ruble.

5. Political ‘witch hunt’

A “wild card” for the ruble comes from potential surprises in the escalating scandal over Russia’s alleged interference in U.S. and European elections, the SocGen analysts said. Bipartisan leaders of the U.S. Senate Banking Committee announced a plan Wednesday to strengthen sanctions against Russia over its actions in Ukraine and in Syria. Andrey Kostin, the chief executive officer of Russian state-run VTB Group, on Thursday likened the scandal to a “witch hunt” in the “new Cold War” against Russia.

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