The Russian currency is surging, as oil prices recover and traders lock in the likelihood of higher interest rates ahead. There are ways to play this story.
Tuesday morning alone, the ruble was up another 70 basis points as the flow of oil out of Russia at higher prices per barrel pushes more and more foreign money into the country in response.
At this rate, it looks like crude might crack $100 a barrel in the foreseeable future, which would only drive additional strength for the ruble against the euro, dollar and other currencies.
Meanwhile, Russian central bankers have started raising overnight interest rates to fight increasing inflation pressures. As a commodity-oriented economy, Russia naturally generates inflation as its oil wells and gas pipelines pump new wealth out of the ground and convert it into foreign currency.
With local rates at only 2.75%, there is a long way to go before a full-fledged tightening cycle ends — which is evidence of just how artificially cheap Bank Rossii has been keeping the ruble over the last year.
As it is, the ruble remains more or less officially pegged to a basket of dollars and euros created to keep the Russian unit stable against its global rivals.
Russian banks are reportedly shifting their reserves to favor rubles, so it looks like traders’ suspicions that this currency will be a huge outperformer in the new year may be rewarded. If so, the ETF XRU is theoretically a decent way for U.S. retail investors to get exposure to this story:
Moscow markets will close on Friday and not open again until after the Russian new year holidays end January 10.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.