All last week, the ruble was relatively stable and even made an attempt to strengthen a little bit. However, the calm in the foreign currency market came as a result of a continuing intervention by the Central Bank that dumped over RUR 10 bln worth of foreign currencies ($127.5K) into the market daily.
At the same time, the ruble had a very weak response to any external positive developments, including the US dollar’s drastic weakening against the world’s major currencies. The federal loan bond market also experienced a powerful rebound as the state bonds won back half of their index losses at the Moscow Exchange. This brings us to a very obvious conclusion that the ruble is fundamentally very weak. This weakness will only get worse with time. Fighting the coronavirus pandemic in the country and the government’s action to support businesses will inevitably lead to a heavy decline in production and reduced tax revenue.
On the other hand, the oil export-based influx of foreign currency will go down exponentially. Judging from Western media reports, the government’s plan to conquer new oil markets did not work out. Moreover, it appears that the Russian oil has been pushed out of Europe, at least for several months.
There are no reasons to hope that the oil prices will even top $30 per barrel within the next quarter. Furthermore, most analysts expect them to drop to around $20 per barrel. If the negative scenario proves true, the ruble is doomed to renew its historic low.
“The ruble is being pulled down by the extreme weakness of the oil prices that continue to decline gradually. The ruble’s downtrend is lagging substantially behind the oil’s collapse – as a result, the ruble worth of a Brent barrel has returned to its 10-year low. This misbalance will not continue for long and, unless the situation in the oil market improves significantly, the ruble may go down faster,” BCS stock market expert Dmitry Babin warns.
It seems unlikely that the Bank of Russia will support the ruble by selling large amounts of foreign currency for a long time. It seems that they will adopt their usual safe and proven method: currency depreciation, which, as experience shows, has only a short-term and only relatively positive effect.
There is no reason to hope that the Western capital outflow will reduce. The decision of the S&P ranking agency to not change Russia’s sovereign rating can have some positive effect on the Russian market. However, the agency’s press release says that it is difficult to assess the consequences of the declining oil prices and the coronavirus pandemic on the country’s economy. So it is possible that Russia’s rating will be downgraded in the near future.
Western currency traders do not believe in the strengthening of the ruble. Thus, in the past three weeks, open interest on exchanges was 5K contracts on the futures markets in Chicago and New York, while in February-March it was 26K-29K contracts.
People also have been withdrawing their deposits, while the queues at exchange bureaus have been growing over the last several days.
This week we expect that the ruble will continue to fall, mostly due to the declining oil prices. Increased currency interventions by the Central Bank at oil prices lower than $25 per barrel will only be able to slow down the fall, but not to stop it completely.
RUR 80 per USD is a resistance point in ruble depreciation. It has been already achieved and we should not expect that traders will take a short position against the ruble, or even more so, sell dollars. The sellout of ruble may slow down at the historical low of RUR 86 per USD.
By Boris Solovyov