Something Has to Give as the Ruble Strays Further Away From Oil

Updated on
  • Brent in rubles drops to lowest level since April 2016
  • Analysts warn currency is becoming detached from fundamentals

The ruble’s disconnect with oil prices is growing deeper by the day.

This week the Russian currency slid just 0.6 percent, even as Brent crude plunged 3.4 percent to $48.03 a barrel. The mismatch has reduced the amount the government collects in rubles from each barrel of oil to the lowest since April 2016.

Analysts from Nomura Holdings Inc. and Societe Generale SA warned last week that the currency of the world’s biggest energy exporter is straying too far from its fundamental value. Next week, the ruble’s value will be tested further when the central bank plans to cut interest rates by as much as 50 basis points, curbing demand from carry traders who borrow where rates are low to invest in high-yielding currencies.

“With oil looking vulnerable and the interest rate differential set to narrow further, demand for the ruble among carry-trade players may weaken,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London. “The pressure is building.”

Central bank Governor Elvira Nabiullina is preparing to keep cutting interest rates after inflation dropped close to the lender’s target of 4 percent. The bank’s last rate cut, a 50-basis point reduction to 9.25 percent, only served to weaken the ruble for one week before it recouped all losses in three weeks of gains.

The currency’s strength is being driven by local demand offsetting the “more cautious international investment community,” according to Tom Levinson, a Moscow-based strategist at Sberbank CIB. That demand will probably dry up in the second half of the year as the currency strays too far from its fundamentals, he said.

(Updates prices in second paragraph.)
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