The Russian ruble has been outstandingly strong against a harsh macro backdrop over the last several months. For example, when oil prices plunged after the last OPEC deal, the ruble showed remarkable resilience. This dynamics strongly contradicts the long-term positive correlation between these two assets.
RUBUSD(white) and Brent futures(purple). Source: Bloomberg
The ruble equally ignored CBR (central Bank of Russia) rate 0.75% cut, Trump-trade unwind and Ministry of Finance USD market purchases. In the same time, Russian ruble-nominated equity index MICEX lost more than 20% and the largest Russia-dedicated ETF RSX broke down its wide 6-months consolidation.
RSX ETF(green) and MICEX index(white). Source: Bloomberg
This phenomenon has several explanations:
1) High ruble rates provide lucrative carry-trade opportunities. Being short the dollar against the ruble earns you an 8.5-9% carry. Other things being equal, buying ruble is a nice place to earn some income.
2) Strong OFZ (Russian government bonds) market. Foreign investors have been increasing their share (30.1% as of April 1) in OFZ this year. And the ruble demonstrates strong correlation with OFZs. Assuming 4% inflation, real rates in OFZs are very strong at the moment.
3) Current account
Surplus in Million USD. Source: Bloomberg
4) Weak USD supports other currencies in general. The dollar trend is debatable, and it is a great theme for a large separate article.
Influence of most of these is starting to fade:
- CBR is about to continue cutting its key rate. Inflation is close to CBR's target of 4%, economy needs a softer credit to grow. Meanwhile, FED is hiking, and interest rate spread is shrinking. So, carry trade becomes less attractive.
- There are talks about new prospective sanctions that can include restrictions on Russian government debt. If implemented this will definitely hit hard OFZs and imminently dampen the ruble.
- Import starts to grow and export revenues decrease as ruble strengthens. So, It's reasonable to expect current account surplus to decrease next quarter.
Moreover, we have several seasonal headwinds coming:
- July is an intense dividend distribution period for Russian equities. Companies will pay approximately USD 18-20 Bln this summer. Substantial part of this sum will be converted to the dollars. It's done to pay dividends for ADRs; similarly many offshore Russian equities' shareholders routinely convert local stocks dividends from rubles to other currencies.
- Summer is a holiday season. People travel abroad and sell rubles to fund their USD and EUR priced vacations.
Thus, it's a great opportunity to open a macro ruble short, given a number of fundamental discrepancies and clear triggers:
- Imposition of new sanctions
- OPEC deal that once again failed to support prices
- Yesterday's FED rate hike and a CBR rate cut coming this Friday
Risk of CBR's interventions is minute as the weaker ruble is required to balance the budget and supports the stagnating economy.
Disclosure: I am/we are short RUBLE FUTURES. 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.