The Irrational Stability Of The Ruble

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Includes: ERUS, RBL, RSX, RUSL, RUSS
by: Oleh Kombaiev

Summary

According to the statistical analysis, the ruble is significantly overbought.

Obviously, the Central Bank of Russia will no longer artificially maintain the domestic demand for ruble.

Russia is preparing for large foreign debt repayments in September.

After achieving the current year's ceiling, the Brent oil price has dropped by almost 12%, while the dollar has strengthened by 3.5% after the British decision to leave the EU. In the meantime, the price of USD/RUB currency pair has remained virtually unchanged over the same period.

But don't rush to conclusions, explaining the irrational ruble's behavior by the stabilization of the Russian economy. In my opinion, it has other reasons, and, perhaps, it is a good time to sell the ruble.

Firstly, as showed in detail earlier, there are no reasons to declare the independence of the ruble from the oil prices. Oil remains Russia's key export commodity and its major source of the exchange inflows.

At that, even without taking into account the high probability of further reduction of oil prices, the ruble has already critically moved away from that price level, which might be regarded as balanced in relation to the current oil price.

As I showed earlier, the ruble's dependence on the oil price with a low degree of error is reflected in the following statistical model:

It's important to stress out that the current price of the USD/RUB currency pair has deviated from its predicted value by more than one standard deviation. This suggests that the ruble is significantly overbought.

Analyzing the internal causes of the ruble's excessive resistance, I highlight two key factors: the season of dividend payments in Russia and the actions of the Central Bank, aimed at artificially increasing the domestic demand for ruble.

In the period from July to August, the companies in Russia pay dividends, the total volume of which in the current year, according to experts' estimates, will total $7 billion. This forces the exporters to sell foreign currency in order to get the right amount of rubles to pay dividends. But once the dividends are paid, some investors will transfer the money into a relatively cheap currency, and this will weaken the ruble.

In June, the Board of Directors of the Bank of Russia lowered the interest rate to 10.5% per annum. Formally, this meant easing of the monetary policy. But in fact, over the past two months the Central Bank was limiting the granting of ruble resources within the framework of the weekly REPO auctions. As a result, the banks could attract only a part of the necessary ruble resources, and at the cost, exceeding the interest rate by 100 bp on average. In the meantime, the demand on foreign exchange auctions was met almost in full and without exceptions.

An exception was the ruble REPO auction held on July 19, at which the Central Bank unexpectedly approved all submitted applications and lowered the cost of resources to the level of 10.87%, i.e. exceeding the discount rate by only 37 bp. It is noteworthy that on the same day, the President Vladimir Putin ordered the Government to come up with a plan of actions to strengthen the ruble despite the lowering commodity prices. Considering that Russia's budget deficit in the first half of 2016 amounted to 4% of the GDP, it is logical to assume that the future stability of the ruble against the background of decrease in oil prices would be contrary to the interests of the Government.

Source of data: The Central Bank of the Russian Federation

And, finally, one should not forget that in the second half of the year, the Russian Federation is expected to make the large foreign debt repayment totaling $56 billion. Moreover, the first substantial payments should be made already in September.

Conclusion

I believe, the period of the ruble's irrational stability against the background of declining oil prices is coming to an end. I expect that in the next two months, the price of the USD/RUB currency pair will increase up to 67 RUB.

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.