Piotr Matys, EM FX Strategist at Rabobank, points out that the 9% depreciation so far this quarter makes the Russian ruble one of the weakest EM currencies, but following the initial sell-off the Russian currency regained composure relatively quickly.

Key Quotes

“In May the ruble significantly outperformed its peers firming 0.9% at the time when the Argentine peso and the Turkish lira plunged to record lows.”

“Essentially, throughout the latest episode of EM turmoil the ruble has been very stable compared not only to the peso, the lira and the real, but to all other EM currencies.”

“What is the source of this stability? While the substantial current account deficit financed by volatile capital inflows makes Argentina and Turkey particularly vulnerable to a shift in market sentiment towards emerging markets, Russia’s C/A surplus doubled to USD 49.9bn in January-May, according to the CBR.”

“Apart from oil prices rising to the highest level in more than three years, Russia is also benefiting from strong external demand for other goods as reflected in widening trade surplus to USD 15.3bn in April from USD 7.3bn last year. Exports growth of 38.9% y/y in April significantly outpaced the pace of imports of 14.6% y/y.”

“In case of Russia, political risk is very low. After Vladimir Putin comfortably won the presidential election in March.”

“In the coming months scope for the ruble to appreciate against the US dollar is likely to prove constrained due to the prospect of further monetary policy tightening by the Fed which could trigger another wave of capital outflows from risky assets.”

“However, we are cautiously optimistic about the ruble over the long-term horizon forecasting USD/RUB at 56 on the 12 month horizon and to fall further to 50 in 24 months. This view is based on the assumption that Russia will make progress on structural reforms and that oil prices will remain relatively stable. A major source of risk to our cautious optimism is a full-scale trade war.”

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