Russian rouble lost 10% in May.
Eurozone woes and cheapening oil are pushing down the rouble.
Greek election expectations will add volatility.
Assessment and outlook
Despite strong macro data for Q1 12 and April 2012 the Russian rouble weakened 10% in May against the dual currency basket, which is the lowest USD/RUB level since spring 2009. USD/RUB yesterday crossed the psychological level of 33 and EUR/RUB traversed 41. These levels triggered many stops. During the first months of 2012 at its maximum the basket traded under 33.5, USD/RUB around 29 and EUR/RUB at 38.5. The Russian central bank has been moderate in its interventions, staying away from radical support of the Russian currency. Its further steps remain unclear as Russian state officials point out that the levels are safe. The rouble is still moving in the predefined corridor of 32.15-38.15 against the currency basket but the MosPrime three-month rate rocketed to 7.24, its highest since December 2011. As seen before, Russian consumers tend to easily exchange their rouble savings for FX when they fear devaluation. A rapidly dropping rouble could also trigger these sentiments.
Behind the drop is mainly the escalation of eurozone worries, which fortifies risk-off sentiment and has led to global capital being withdrawn from assets in emerging markets and being moved to ‘safe havens’. Capital outflow remains a weakening factor and climbed to USD42bn in January-April 2012. Fears of a slowing Chinese economy are pushing energy prices down. Brent oil fell more than 10% in May, returning to the lowest level since December 2011. Other emerging currencies have been also weakening: Brazilian real fell almost 10% in May against the dollar and Indian rupee lost 5.5%.
Eurozone uncertainties are increasing due to the Greek elections on 17 June. Fears of a worsening Spanish economy add to the gloomy mood in the markets. We expect the Russian rouble rate to be very volatile in June as increasing global fears will rub off on the rouble. The strong fundamentals of the Russian economy should calm volatility in the long run but we recommend raising the hedge ratio for the rouble in June until there is more clarity about Greece’s future in the eurozone.