Buy The Russian Ruble, But Cap Your Risk

by: Seung Kim

Summary

The Russian ruble has been hit hard recently, but Russia has indicated a desire to deescalate the situation in Ukraine.

Technical analysis indicates an attractive risk-reward entry point in going long the Russian ruble.

The trade isn’t without risk, but it can be limited by liquidating the trade at USDRUB 36.75 if the ruble weakens further.

When Malaysia Airlines Flight 17, carrying close to 300 people, was shot over Ukraine by a ground-to-air missile, the Russian ruble sharply weakened, falling from approximately 34 Russian rubles per United States dollar to 36.5 Russian rubles per United States dollar.

USD:RUB exchange rateClick to enlarge

The tragedy broke the trend of a strengthening Russian ruble that was quietly gaining even with geopolitical headwinds. The Russian ruble sank lower as sanctions by the European Union and the United States were imposed on Russia in the coming days, and vice-versa. Tensions peaked when Russia held military exercises near the Russian-Ukrainian border.

Recent Developments

However, Ukraine's military has recently gone on the offensive against pro-Russian separatists. The surge into territories held by pro-Russian separatists follows Ukraine's rejection of a cease-fire offered by pro-Russian separatists. With Ukraine reclaiming lost territories and Russian President Vladimir Putin still keeping Russian forces outside of Ukraine, the market has taken a favorable view of the recent developments, sending the Russian ruble higher. More importantly, there have been signs that Russia is looking to mediate a truce between Ukraine and the separatists.

The Charts

The daily chart (as previously displayed) show a possible intermediate high in the USDRUB (or low for the ruble relative to the US dollar). The monthly chart also shows strong resistance to the USDRUB going higher as the currency pair has reached levels only seen during the 2008 financial crisis.

Click to enlarge

The Trade

While it's impossible to predict what may ultimately unfold in Ukraine, the black swan scenario is a Russian incursion into eastern Ukraine while the baseline scenario is a gradual relaxation of tensions. Furthermore, the Russian ruble has already been severely weakened over the past few weeks and looks attractive when gauging the 14-day relative strength index. Thus, the current price is an attractive entry point to initiate a long Russian ruble position.

However, it is difficult to ignore that the situation depends entirely on the whims of Putin. Consequently, the most prudent course of action is to initiate a long ruble position with defined risk parameters. For USDRUB, positions should be liquidated if the ruble weakens to 36.75. With the ruble at approximately 36.10, this indicates roughly a 2% move down in the Russian ruble.

Conclusion

While trading the Russian ruble may seem risky, we believe that by setting strict risk parameters, shorting USDRUB, may prove to be a worthwhile opportunity at these levels. While the sanctions imposed may have later consequences for the Russian ruble and economy, the situation currently seems to be deescalating to the point where a relief rally for the Russian ruble seems likely. However, to reemphasize, this is one trade that risk must be capped at the predetermined levels.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is short USDRUB for his personal account and his clients' accounts.