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Rate Cut Can't Douse Rally for Ruble Craved by Foreign Investors - BLOOMBERG

SEPTEMBER 13, 2017



By Natasha Doff and Ksenia Galouchko

  • Morgan Stanley, HSBC, Nordea see currency extending rally

  • Russia expected to cut interest rates by 50bps on Friday

Bank of Russia to Weigh Rate Cuts, Says Governor

Inflows from foreign investors first made Russia’s ruble oil-proof. Now, not even a projected 50-basis point rate cut can stem its rally.


Analysts at Nordea Bank AB and Morgan Stanley are forecasting the ruble will extend the second-best rally in emerging markets in the past month after the central bank meets on Friday as foreigners continue buying the currency to invest in the local bond market. A smaller-than-forecast cut of 25 basis points could even push the currency to its strongest level this year, according to HSBC Holdings Plc.

Inflows from investors lured by one of the highest real yields among developing nations have become the single most important metric for the ruble this year, eroding the currency’s historic link with oil prices. The trend is making the currency increasingly vulnerable to a shift in global sentiment that could cause a sudden pullback from emerging markets.

“I am still positive on the ruble,” said Sergei Strigo, the London-based head of emerging-market debt at Amundi Asset Management, which oversees more than $1 trillion. “There is continuous demand for OFZs and typically it will be unhedged, so with ruble exposure.” 

A study by Nordea published this month found that periods of overvaluation for the ruble correspond to rising inflows into Russia-orientated investment funds. Foreign ownership of ruble bonds, also known as OFZs, climbed above 30 percent for the first time ever this year.

Chart from Nordea research note showing the ruble’s correlation with capital flows

The increasing reliance on foreign inflows could be setting the currency up for a fall if appetite for Russian assets sours, Dmitry Polevoy, an economist at ING Groep NV, said in a research note this week. Deutsche Bank warned earlier this month that “crowded” bond markets like Russia’s are vulnerable to external shocks such as a rise in U.S. interest rates.

Russian Finance Minister Anton Siluanov dismissed the concerns in an interview with Bloomberg News last week, saying that while inflows are “undoubtedly” impacting the direction of the ruble, “we don’t expect any significant changes in exchange-rate dynamics.”

An unexpected drop in the inflation rate to a record 3.3 percent from a year earlier last month makes a cut this week almost a given. Most economists polled by Bloomberg see the central bank lowering the key rate by 50 basis points to 8.5 percent. Just five of the 35 analysts in the survey say it will be cut by 25 basis points.

“Even if Russia cuts rates by 50 basis points, real rates remain close to 5 percent, the highest outside Brazil,” Clemens Grafe, an economist in Moscow at Goldman Sachs Group Inc., said by email. “Hence the Russian ruble carry will remain attractive."

— With assistance by Zoya Shilova





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