High Demand For Ruble Will Result In Further Decline Of USD/RUB

by: Oleh Kombaiev

Summary

The real rates on the interbank market of Russia have significantly increased the interest rate.

The Central Bank of Russia is not fighting against the deficiency of ruble liquidity.

Foreign investors actively return to the Russian market.

Last month the Central Bank of Russia made another step towards easing the monetary policy by lowering the interest rate from 10.5% to 10%. However, in fact, no easing has occurred to date. Moreover, growing ruble scarcity on Russia's interbank market creates good preconditions for further strengthening.

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One of the indicative rates on the ruble credits (deposits) on the Moscow money market is MosPrime Rate (Moscow Prime Offered Rate). In fact, it is a rate at which Moscow banks provide loans to one another.

To date, the difference between MosPrime Rate and the official interest rate has reached the maximum level over the past six months. This is a direct consequence of the fact that there is a ruble scarcity on the Russian domestic market.

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Source of data: Bank of Russia

Most notably, the Central Bank doesn't even try to influence this situation. Moreover, it seems that the Central Bank purposely creates it.

In the Q3 of this year, the Central Bank held only eight 7-day ruble REPO auctions totaling 2.3 trillion rubles. For the same period of the previous year, the Central Bank held 13 auctions, providing the banks with 15.3 trillion rubles.

Moreover, since August, the Central Bank has already held 7 deposit auctions, in the result of which the free ruble liquidity declined further.

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Source of data: Bank of Russia

It is obvious that the Central Bank is comfortable with a situation of high demand for ruble in anticipation of the upcoming major foreign debt repayments.

It is also possible that the Central Bank is interested to strengthen the ruble before starting a scheduled replenishment of the International Reserves.

Anyways, the Central Bank obviously does not preclude the further strengthening of the ruble.

A surge of interest of foreign investors in Russia additionally supports the ruble. According to EPFR, for the week ending October 12, investors attracted $139 million in funds targeting Russian assets. This is 1.8 times higher than for the previous week. Since the beginning of September, the fund inflows totaled nearly $ 400 billion.

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Source of data: ria.ru

The technical analysis also confirms the continued downward path of USD/RUB. In the short term, the consolidation of quotes between 61.8 and 63 RUB is most likely. However, as soon as the price of Brent oil will be able to overcome $ 53, USD/RUB currency pair will start moving towards the main goal at the level of 60 rubles.

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