According to the Research Team at Nordea Markets, the Russian ruble has been performing quite well since the beginning of the year but they warn that volatility is likely to return as sanctions risks come back in focus.

Key Quotes: 

“The RUB was enjoying, to the fullest, the general EM recovery fuelled by a softer Fed and hopes around a potential US-China deal. The oil price settled above the psychologically important USD 60/bbl threshold, which provided additional support. The sovereign rating upgrade from Moody's to investment level was another reason behind the strong appetite for Russian assets. As a result, by mid-February, the RUB appreciated by 5.8%, thereby showing the best performance among EM currencies.”

“With limited sanctions talk since autumn 2018 (except positive news on Rusal delisting from the SDN list), the market started to forget about sanctions. The country risk premium, as measured by CDS, has narrowed to just 130 points (lower than before the August sanctions wave). Foreign investors came back aggressively, buying record amounts of RUB-denominated bonds and stocks. RUB volatility briefly decreased below that of the EM average, touching the lowest level since the April sanctions episode. The RUB appreciated all the way to the robust support level of 65.5 vs the USD, and was about to test it, but a new wave of sanctions threats spoiled the party.”

“As a new sanctions bill is being pushed forward through the US Congress, news flow on the subject will intensify in the coming months. Even though there is still a long way to go before new waves of sanctions are implemented (if implemented at all), this topic will again become the focus of the market, promising more pressure on the RUB and more volatility. As the market is warned that sanctions risks are not off the table, the levels around 65.5 vs the USD and 74 vs the EUR should remain the limit for RUB appreciation.”

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