USD/RUB: Rouble to rebound as geopolitical fears ease – MUFG

During October the Russian rouble weakened against the US dollar from 77.626 to 79.321. A significant risk premium has already been priced into the rouble ahead of the US election which should help dampen further downside risk, according to economists at MUFG Bank.

Key quotes

“The bulk of rouble weakness though during the second half of this year reflects heightened concerns over the risk of further sanctions being imposed on Russia following the US election. Those fears have been reinforced by ongoing political instability in Belarus as market participants continue to watch to see how Russia responds to social unrest. Market participants are already anticipating that relations between the US and Russia will deteriorate after the US presidential election in anticipation that the Democrats take control.” 

“We estimate that the rouble is already pricing in a substantial geopolitical risk premium into the rouble relative to short-term fundamentals including the price of oil which should help dampen further downside risk. The rouble would be a big beneficiary if the US polls were wrong again and Donald Trump remains President.” 

“Based on relative fundamentals the rouble appears undervalued, and we expect it to rebound in the year ahead as geopolitical fears eventually ease. Yields in Russia remain relatively high offering support for the rouble even after recent CBR policy easing. The scope for further CBR rate cuts is more limited in light of rouble weakness and headline inflation currently running at 3.7% in September. Yields should remain at relatively attractive levels in Russia offering support for the rouble.”