As soon as Brent oil price overcame the milestone of $50 per bushel, the Russian ruble went back to its natural direct dependence on the oil price. Anyway, during the first week of October, the rate of the currency pair USD/RUB almost perfectly matched the level projected on the basis of the statistical model.
Forecasting the prospects for the ruble, I proceed from the assumption that Brent oil price will continue to rise up to the level of $ 55 per bushel. Based on the mentioned statistical model, that means the potential for reducing the cost of USD/RUB up to the level of 60 rubles.
The technical analysis confirms a high probability that this will happen. The USD/RUB price broke all the key levels of support, and the current goal is 60.9 rubles.
The key risk, however, is that the Central Bank of Russia may decide to take advantage of the current strengthening of the ruble in order to build up the international reserves of the Russian Federation.
In 2015 the Central Bank already resorted to such actions. For instance, in May 2015, when the price of USD/RUB dropped to 50 rubles, the Central Bank started daily dollar purchases on the domestic market in the amount of $100-$200 million. For two months, the Central Bank bought $10.1 billion. Of course, it essentially weakened the ruble.
The current size of the international reserves of the Russian Federation is $397.743 billion. However, the Central Bank's long-term goal is to increase the size of the reserves to the level of $500 billion. Thus, the question is not whether the Central Bank will buy foreign currency, but when will it start buying it?
In my opinion, the Central Bank will not hurry to do it before being sure that the relatively high oil prices are sustainable. And there will be no such confidence until the details of the agreement on freezing the oil production by OPEC and Russia are known.
In the last quarter Russia will pay a substantial part of its external debt. In such conditions, even a small Central Bank's demand for currency will lead to a substantial weakening of the ruble and rise in inflation. The latter is especially unacceptable to the Central Bank, given its long-term objective to achieve stable inflation in Russia at the level of 4% per year.
In addition to these risks, the Central Bank will have to take into account the probable interest rate rise in the United States before the end of this year, as well as the growing political tensions associated with the conflict in Syria.
Thus, I believe that at least until the end of the year the Central Bank of Russia will have to resist the temptation to start replenishing its reserves. This will allow the currency pair USD/RUB to freely reach the mark of 60 rubles.
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.