Forget The Ruble: To Russia With Love

With the ECB and NFP remaining "front and center" this week, it's the 18-member single currency and its direct counterpart that will garner most of Capital Market's attention before the end of business come this Friday. In a contained trading range some or the periphery currencies will try to move with a bit more vigor. For the proactive investor, rather than wait for the rest of the "lemming brigade," finding that one particular currency and understanding it better gives that individual an advantage and more importantly an opportunity not to "watch paint dry."

Despite Russia versus the "rest of the world" seeming to have come-off the immediate boil over the Ukraine and Crimea, it's lower Russian equity and oil prices that are weighing on the rubles current value (RUB). Putin's currency has weakened further this Wednesday (-0.3% to 35.42 outright) after the Russian Finance Minister announced plans to resume buying foreign currencies for its depleted reserves. Why now? It would seem that Russian authorities are confident that the present situation is calm enough and that any additional USD purchases are not in danger of pushing the RUB significantly lower.

In early March the RUB traded at record new lows outright against the USD and the EUR - the rest of the world just does not trust Putin or his country's actions in neighboring Ukraine. The speed of the RUB's downfall required the Central Bank of Russia to step in and aggressively sell foreign currencies at the fastest pace in five-years to prop up their own currency. In March alone the CBR sold $22.3b and €2.3b to support the ruble. The currency has managed to recover somewhat from its recent record lows witnessed a few weeks ago. Since March 3rd, the RUB has rallied +4% outright and currently trades shy of 35.33.

The CBR remains worried about high inflation and is not expected to 'ease' monetary policy anytime soon. The fixed income market has priced in no rate move until at least June. CBR governor Elvira Nabiullina said that consumer prices have been fueled by Russia's own currency weakening, however, analysts expect inflation to stabilize in H2, where it may still manage to exceed the CBR's main target of +5%. Already last month, Russian policy makers took the aggressive steps of unexpectedly raising interest rates +150bps (+7%) to limit the RUB downside and dampen inflation acceleration. The current inflation rate is running at +6.64%, just above the upper end of the CBR's target of +3.5-+6.5%.

Russian policy makers sees economic growth hovering just below +1% while Capital Outflows (foreign interest and Putin's Oligarch friends) will probably greatly exceed most of the early forecasts of around $20b. The Russian economic ministry's capital outflow prediction seem to be a tad more realistic - they see it reaching up to +$70b in Q1 and growing to around $150b by year-end. Now we have to follow that money and figure out which currency will benefit the most? Will it be the neighboring EUR or the PBoC weakened Yuan, or perhaps it's sterling - a few English football clubs would not mind the support of one or two new oligarchs!