The Ruble Won't Last

by: Oleh Kombaiev

Summary

The increased likelihood of tightening of the U.S. monetary policy and its weakening in Russia impedes the further ruble strengthening.

The Russian stock market is brewing a downward correction.

Seasonality and the overall technical picture do not indicate the bullish potential of the ruble.

The ruble and oil

Starting from February 2016, the oil price benefits the ruble. Hence, at the moment, it cannot yet be argued that its positive momentum has dried up. The continued decline in the rig count in the United States against the background of Goldman Sachs's allegations on the accelerated market transition to the shortage phase may well provide the Brent price movement to $51-$52 per barrel. But the further rise of oil price is unlikely at the moment. Firstly, because of already oversupplied oil market, and secondly, due to the likely growth of oil production in Russia and OPEC. In addition, the funds began to reduce their long positions in oil, and it also signals the market approximation to a local peak.

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Source: Saxo Group

The current ruble price almost exactly corresponds to the predictive value of the statistical dependence of the USD/RUB currency pair and the price of Brent oil barrel. The history shows a rather volatile ruble behavior at the current oil price level - this means the increased role of non-oil factors in the ruble pricing.

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The dollar prospects

The dollar prospects are important for predicting the value of the currency pair USD/RUB. According to COT, in the week ending May 10, the funds became net buyers of the dollar for the first time in the last 10 weeks. Here, in my opinion, the impact of the rising expectations of the soon U.S. monetary policy tightening is obvious. Technically, the dollar also seems oversold. Thus, the likely strengthening of the dollar will become an obstacle to the further growth of the ruble.

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Source: Saxo Group

Fund flows

Stock and money markets are substantially interrelated. The correction, brewing now in the Russian equity market, will not support the ruble. From my point of view, the withdrawals from funds investing in Russia are the harbingers of this. During the week ending 11 April, the outflows of from funds targeting Russia amounted to $137.1 million. The fall of the stock market liquidity will weaken the national currency.

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The monetary policy of the Central Bank of Russia

According to Rosstat, the inflation from 5 to 10 May was 0.1%. The monthly inflation in April amounted to 0.4% against 0.5% in March. On a year-on-year basis, the inflation remained at the level of 7.3%.

The inflation expectations for the next 12 months fell below 15% and probably will continue the reduction trend. Obviously, raising the excise tax on gasoline and oil products in Russia since April 1 will have no significant impact on inflation in the coming weeks.

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In the meantime, the economy is increasingly in need of stimulation. According to Markit, the PMI in the manufacturing industries of Russia dropped to 48 points in April 2016 versus 48.3 in March. This is the lowest PMI over the past 8 months.

At Central Bank's meeting on April 29, the interest rate remained at its previous level (11%), but the head of the Central Bank drastically eased her rhetoric which gives reason to expect a reduction in the discount rate already at the next meeting of the Central Bank on June 10. It will also contribute to the ruble weakening.

Seasonality

The history of the ruble market pricing is relatively short, but it is already possible to highlight its seasonal cycle, in accordance with which here comes the ruble weakening phase.

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Conclusion

Technically and fundamentally, there are resistance factors on the way of further ruble strengthening. The significant rally in the oil market is capable of overcoming these factors. But, with this exception, the USD/RUB currency pair is unlikely to stay at the current level.

Unless otherwise noted, all charts included are my own.

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.