Ruble Has An Upside Potential

by: Oleh Kombaiev

Summary

The current oil price assumes more expensive ruble.

The Central Bank of the Russian Federation restricts the domestic ruble supply.

FX players have gone long the ruble.

After riding out another New Year's rally, the Russian ruble is consolidated in search of further trend. However, even with the common insecurity of the Russian market, I think that the scenario of further ruble strengthening still has a chance.

Traditionally, when ruble predicting, the energy market should be considered first of all. Oil acts "nervously" without a clear medium-term trend.

On the one hand, we have a number of statements from key oil-producing countries of the need for a common meeting and search of new coordination format and depletion control. On the other hand, we have the U.S. commercial crude stockpiles that have reached a new all-time peak with no evidence of significant US oil production deceleration.

In my opinion, the chance of a general agreement cannot be discounted. Therefore, when assessing the ruble prospects, I suggest starting from the assumption that Brent crude oil will be traded ranging from $31 to $36 during next month.

Earlier, I described in detail the statistical model of USD/RUB pair dependence on the Brent crude oil price a barrel. Based on this model, I provide the current USD/RUB downside according to the forecast level.

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As seen, since February the ruble is traded by 2 rubles cheaper than its balanced level, i.e. there is some fundamental ground for its strengthening.

The actions of the Central Bank of the Russian Federation are on ruble-side. On January 29, 2016, the central bank kept the dealing rate unchanged at 11% for the fifth time already. A regulator with increasing persistence limits the ruble demand within the banking system forcing exporters to sell currency spot. In the last month, the weighted average interest rate on ruble 7 day-REPO increased from 11.6% to 12%. The ratio of quantity demanded and credit requests volume reached nearly 4 to 1 during the last week auction. Since February 12 the next successive tax period will start in the country, and the domestic ruble demand will grow even more.

There are certain "pleasant" signals from the external market as well. In particular, the total net cash inflow into funds, which invest in the Russian Federation's shares, was $1.1 million a week before January 28-February 3, 2016 (an outflow of $113.4 million during previous week). The total net cash inflow into funds, which invest only in the Russian Federation's shares, amounted to $13.1 million for the same period (an outflow of $33.8 million during previous week).

Source: SAXO Group.

For the first time, since November 2015 money managers have gone net long in Russian ruble futures. The situation is precarious, but there is no build-up of short positions, and this gives some cautious optimism.

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Source: SAXO Group.

I want to pay attention to seasonality. The history of the ruble market pricing is relatively short, but it is already possible to mark some seasonal cyclicality whereby the ruble strengthening stage starts.

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Overall, I still think that USD/RUB pair has a chance of strengthening up to the level of 72 rubles and below during near months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.