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Thursday, October 27, 2016

When the cost to buy foreign currency to travel on holiday – expert advice

Since the beginning of the year, the Russian ruble strengthened against the dollar and the Euro. But soon things will change – and our “wooden” starts to fall again. So those who are planning to go during the summer vacation abroad, it’s time to think about currency exchange.

photo: Gennady Cherkasov

Don’t believe those who say that the Russians are now poor and can’t afford overseas travel. Yes, the demand of our fellow citizens on the Western tourist trips fell by approximately 1.5 times compared to the previous year. But it has not disappeared entirely – and, accordingly, smart tourists can make a profit on the basis of the analysis of the actions of previous generations of their own kind.

The analysis of this simple. The last few years, the demand of the Russian population for foreign currency is highly cyclical in nature. As a rule, the main wave of demand is in December, and the wave is smaller for summer and autumn months.

One of the main causes of such cycles, in addition to wavelike movements in the oil price is high tourist activity of the Russians. And this factor should be considered for those who want to go abroad this year. In addition to peace of mind for their plans, advance purchase of foreign currency with high probability, can protect against impairment of savings, and even will let you earn from the exchange rate differences.

The conclusion is simple – if you’re going abroad in the summer, the currency necessary to buy now, not waiting until it will rush the crowd of compatriots and prices soar.

However, there is another factor – market prices for the currency on the Russian market, which can lead, as we have seen in the last two years, significant fluctuations of the ruble. But, oddly enough, is now also increasingly less clear. The fact is that after the transition of the Bank of Russia to a floating exchange rate at the end of 2014, the ruble has become much easier to predict – even despite a natural surge amplitude short-term fluctuations of the Russian currency. The reason is simple: changes in exchange rate policy of the Central Bank on the ruble was influenced by non-market factors such as, for example, interventions by the Central Bank or even the mere presence set by the regulator “of the currency” corridor, which deter “speculators”. Now ruble quotes change almost exclusively under the influence of market factors and depend only on supply and demand. So, for the last six months the ruble exchange rate to 85-95% was due to price movement of Brent crude oil – i.e., between the values of the data exchange tools there has been a steady significant statistical dependence. If this dependence is extremely simplified, it will look like the following: for every a $1.19 increase in the price of Brent crude oil, the U.S. dollar depreciates by 1 ruble.

Knowledge of this dependence allows to predict with a fairly high accuracy rate of the ruble in the short term next 1-2 quarters. It is, as always, for small – to learn how to predict oil prices. The task, at first glance, hopeless – who just got burned on these forecasts over the past few decades. However, the situation is changing. Now the volume of supply in the oil market is mainly dictated by the volumes of supply from shale deposits in the United States. And these fields are under the supervision of the U.S. energy (EIA) – not in terms of control of ownership, of course, but from the point of view of continuous monitoring. That is why the EIA forecasts currently can be trusted – at least in the medium term.

And according to these forecasts, in particular, that the price of Brent crude oil will match those on the American WTI and the average in the second half of 2016 will not exceed $35 per barrel.

If you use the above statistical relationship between oil prices and the ruble exchange rate, then this gives good reason to expect in the second half of the current year weakening of the ruble to a level of about 76.5 rubles per U.S. dollar. Given that now the US dollar on the Moscow stock exchange is worth about 66 rubles, the national currency has the potential of weakening from current levels of around 16%, which obviously more than offset the conversion costs and lower interest rates on short-term foreign currency deposits.

Of course, this forecast does not account for geopolitical factors. For example, sudden withdrawal of anti-Russian sanctions will undoubtedly lead to a strengthening of the ruble, regardless of the situation on commodity markets. Also in the policy can interfere with the monetary policy of the Bank of Russia. However, the probability of these types of scenarios, personally, I appreciate both quite low.

Timur Nigmatullin,

analyst CC “FINAM”

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