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Friday, March 16, 2018

The foreign exchange market has been a paradox

The Russian currency has been growing for a few days, though obvious reasons for this, it would seem, is not observed. Moreover, the Ministry of Finance buys us dollars and euros, the ruble should decline to respond, but everything is exactly the opposite. How can we explain the anomalous increase of the ruble and what to expect in the near future?

The Russian ruble since the beginning of the year rose 6.5%, and at 3.25% it has grown just in the last week. The Russian currency strengthened is much greater than other commodity currencies. On Wednesday morning, the ruble continued to update the multi-month records. By noon, the Euro fell below 60 rubles, which was the first time since June 3, 2015. The dollar was at 56,55 of the ruble for the first time since July 15, 2015.

“Say, what happened to the paradox – currency purchases by the Ministry of Finance has supported the strengthening of the ruble”

And despite the fact that Tuesday of last week, the Treasury began to buy foreign currency in the amount of received additional oil and gas revenues generated by the increased oil. This fact had to weaken the ruble, or at least not to allow to grow further. In this case, and external factors such as the growth of oil prices on the growth of the ruble either. However, the Russian currency still strengthened. What happens?

In fact, a single global cause, which would be moving up the ruble, no. After all, oil prices – and this is the main external factor influencing commodity currency, not much growing. “Oil prices have stabilized, and this is very important. In terms of stability in the oil market, improvements in the economy and weakening the Euro, the ruble makes up for his. We attribute the growth of the ruble with its undervaluation”, – says the Deputy Director of analytical Department of “Alpari” Anna Kokoreva.

Plus now in the currency market there is clearly a speculative boom. Many traders who have played in the weakening of the ruble, I realized that was right. So now they are trying to sell foreign currency to reduce their losses from the appreciation of the Russian. In addition, the exporters are also trying as quickly as possible to sell the currency for payment of taxes in February, because the background of a further strengthening of the ruble, they risk getting less money for the conversion. “The speculative component in the strengthening, but it still is not a key driving force,” – says Kokoreva while.

But, most importantly, how to explain, that he who began buying foreign currency, the Finance Ministry was not able to weaken the ruble, as many expect? Anton Siluanov at a lecture for students of the Financial University explained that if it were not for currency interventions of the Ministry of Finance, the ruble strengthened would be much sharper. “If we had not started to buy approximately 100 million dollars per shopping session if we did not buy currency in the foreign exchange market, the exchange rate would strengthen more sharply than it’s happening now. And then a little bit prices in the foreign markets… or capital outflows would have increased slightly, they would immediately go back,” he said, according to RNS.

However, experts believe that happened a paradox – currency purchases by the Ministry of Finance contributed to the strengthening, not the weakening of the ruble. The first steps in the application of fiscal rules has helped to reduce the volatility of the ruble and made more attractive so-called carry trade operations with ruble-denominated assets, explains the chief analyst of the Bank Natalia Vasilyuk. This common transaction – when going on simultaneously selling low-yielding currencies and buying currencies with higher interest rates. Due to low rates of the fed and zero from the ECB, the Russian Central Bank keeps the rate at 10%. This makes for an attractive carry trade transactions with ruble assets.

In addition, against the background of replenishment of reserves by currency the Ministry of Finance has improved expectations about the macroeconomic stability of the Russian economy, which is also made attractive ruble-denominated assets.

Verbal intervention

After a week of growth on Wednesday afternoon the ruble suddenly turned lower against the dollar and the Euro. However, it is unlikely that this trend will last. A small turn is due, first, a correction after the updates from the morning highs for a year and a half, and secondly, a review of the press Secretary of the Russian President on the forthcoming meeting of Vladimir Putin with the head of the Ministry Maxim Oreshkin. On it, they will discuss the macroeconomics and perhaps the current exchange rate of the ruble, said Dmitry Peskov, and the ruble went down.

It is clear that the Russian budget, as well as exporters, the strong ruble is not necessary, and the Russian authorities have repeatedly said. The budget eventually gets less revenue, and exporting becomes less profitable to break into foreign markets.

However, these verbal interventions Peskov could not be enough and the ruble may soon re-start its growth. “The potential of the Russian currency has not been exhausted, she has room to grow,” – says Kokoreva.

In its forecast, in the short term, the pair dollar/ruble has all chances to fall to 55 rubles, and in the medium – to 53 rubles. More strengthening should not count. A maximum of 53 to 55 rubles per dollar is the fact that the budget deficit will allow the Russian Ministry of Finance, says Kokoreva. If need be, the monetary authorities will start taking measures to stop the growing ruble.

It is not excluded that after the words Peskov followed by a whole series of “verbal intervention” by the Russian authorities to weaken the strong ruble. And then may be the reduction of the key rate at the meeting in March (this is the medium factor of influence). Another positive effect of the strengthening of the ruble in the near future may be a reduction in the rate of inflation.

As for the Euro, its exchange rate against the ruble decreases even more actively than the dollar. “This is due to the weaker position of the Euro on the currency market. The head of the U.S. Federal reserve announced a possible rate hike in the near future, after the fall of the Euro/dollar increased. Accordingly, the reduction of the Euro/ruble also added the go”, explains the expert. However, the Euro against the ruble may move up from current levels, but in the long term has the potential to fall to 57 rubles, and perhaps even lower.


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