EM Rundown: Traders Not Enthused by Russia-Ukraine Talks

Markets have officially entered the dog days of summer, with volatility plumbing historical lows in both the G10 and emerging markets, and market movement could remain subdued until traders return from their summer vacations for the start of September. That said, there are a few reasonably impactful data releases on tap from the G10 this week, whereas geopolitical developments continue to keep EM FX traders on their toes.

The flashpoint for geopolitical developments has been Ukraine for this entire year, and this week appears likely to echo this tendency. Over the weekend,news that pro-Russian rebels had shot down a Ukrainian fighter jet emphasized the volatile nature of the conflict, but by the market open on Sunday, the situation had improved markedly. In fact, the Russian Foreign Ministry stated that “certain progress” had been made in Sunday’s peace talks in Berlin and further meetings have been scheduled between the relevant parties. The surprisingly positive tone to this weekend’s talks in Berlin has stoked risk appetite, supporting equities and EM currencies on the first day of the week.

Central Bank of Russia Relaxes Currency Control Further

Despite the optimistic tone out of Berlin though, all is not necessarily well for Russia-West relations. In a seemingly unrelated development, the Central Bank of Russia widened its trading band. In another step toward a completely free-floating currency, the central bank widened its collar for the ruble basket (the value of the ruble against the euro and the US dollar) from 7 rubles to 9 rubles and opted to cease intervening in the market as long as the currency remained within the basket.

This decision represents a strong move in the direction of a completely free-floating currency, a goal the central bank hopes to achieve by the end of this year. Indeed, for all practical purposes, the ruble is effectively a free-floating currency now, so EM traders should be cognizant that the ruble’s volatility may remain elevated as long as Ukraine remains the epicenter of geopolitical risk. In addition, this move reflects the Russian government’s increasing loud calls for more competition in global FX landscape, especially regarding the US dollar as the world’s sole reserve currency.

Technical View: USDRUB

Speaking of the ruble, traders have not been particularly enthused by the conciliatory talks or Russian Central Bank’s actions. As we go to press, the USDRUB is consolidating in the middle of last week’s range around the 36.00 handle. While traders remain on edge from a fundamental perspective, there are tentative signs of a near-term top from a technical perspective. The RSI indicator remains dangerously close to overbought territory, whereas the MACD indicator is starting to roll over, suggesting a possible shift to bearish momentum this week.

If USDRUB drops below last week’s low near 35.80, a deeper retracement toward the Fibonacci retracements of the recent rally at 35.40 (38.2%) and 35.05 (50%) is likely. Meanwhile, if the violence does re-escalates as it was threatening to late last week, the pair could make another run at 5-month high near 36.50 or even the all-time high at 36.90 in time.