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According to analysts at Nordea Markets, further tightening by the Central Bank of Russia is off the table and when combined with a softer Fed, this gives plenty of reason to expect more demand for Russian assets translating into a stronger RUB.

Key Quotes

“RUB is the best performing EM currency YTD showing a stellar appreciation of more than 8%. Levels around 65-65.5 vs USD seemed to be impenetrable for the RUB in January-February. Trading volume was at record low levels (below USD 2bn per day) suggesting that the speculative activity came to a standstill because of sanctions uncertainty. It seemed that the flows meeting on the market were just those of exporters and importers.”

“The situation has changed quite dramatically in mid-March when the RUB easily came below 65 vs USD for the first time since August 2018. We believe that one of the triggers for this move was the publication of February statistics on inflation which has confirmed that prices reaction to the VAT hike is more modest than expected (February inflation stood at 5,2% vs CBR forecast of 5,5-6% in Q1). This has essentially taken the possibility of further rate hikes in 2019 off the table and gave way to discussion about the timing of the first cut. In the absence of further tightening prospects, Russian sovereign debt (OFZ) attractiveness has increased. Demand for it is capable of becoming an important driver for the RUB in the coming months.”

“A decreasing risk premium brings the RUB closer to fundamentally justified levels from which it has substantially deviated last year because of sanctions.”

“Moving further out in our forecast horizon we expect some RUB depreciation in 2020 mainly due to a weaker performance of the global economy.”