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Wednesday, February 21, 2018

The rate hike by the fed creates the preconditions for the weakening of the ruble

The pressure on the Russian ruble increases – so the financiers are advised to take a rate hike by the Federal reserve. But even more decisive for the ruble will be forthcoming in the next few days the decision is not an American, a Russian regulator.

The Federal reserve announced to raise the base rate from 0.5 to 0.75% up to 0.75–1% per annum – and this is the second such increase, according to Reuters.

“The March rate hike by the fed plus the increase in 2-3 times to the end of the year will still be to create the conditions for the weakening of the ruble”

The rate increase was predicted by experts and the head of the regulator Janet Yellen previously hinted at it. The key parameters of the U.S. economy, particularly employment and consumer prices are gradually approaching the fed’s established goals. In particular, on Friday published data on the unemployment rate – it fell by 235 thousand, or 4.8% to 4.7%. “Now the fed has no constraints in the form of consequences “Broksita”, election trump and clear in General economic vector of the new administration. It is going to dramatically increase infrastructure and military spending, so the growth rate looks as opposed to these plans”, – says Artem Deev from AMarkets.

Even previously skeptical minded traders now believe in the seriousness of the fed. Some analysts even expect not three, but four rate increases this year.

Now the main topic for discussion will be the rhetoric of the head of the fed Janet Yellen, which will depend on the reaction of oil and the dollar. However, some conclusions can be drawn already now. Former Finance Minister, now head of the “Centre for strategic developments”, Finance Minister Alexei Kudrin wrote on Twitter that a rate hike the US fed’s March 15 “will weaken emerging market currencies”, which also include the ruble.

However, to speak about the weakening of the currencies of developing countries after the increase of the rate is incorrect, said the Deputy Director of analytical Department of “Alpari” Natalia Milchakova. In her opinion, not a fact that this will lead to a weakening of the currencies of developing countries, and not the fact that the dollar strengthening will not impact negatively on the Euro.

“In the longer term can happen and Vice versa – the risk for the dollar could come from the Euro if the European Central Bank will begin to reduce the amount of programs of purchase of assets earlier than planned or perhaps resort to raise interest rates even while maintaining measures of quantitative easing,” – explains head of analytical Department of Bank “Zenith” Vladimir Evstifeev.

Of course, the short-term the ruble may weaken, however, the dynamics of the rouble will depend more on how much will drop the price of oil as a result of the fed rate hike, said Milchakova.

The main period of sharp fluctuations on the announcement of the decision on the rate of the Russian currency flow, so as the markets this time will be closed. But on Thursday morning, the pair dollar/ruble may open a small gap in the area of 59,70, says Alyona Afanasyeva from Forex Club. “However, the strength of the dollar when the aggressive attitude of the fed long to have an impact on the pair. The main factor Thursday will once again be oil, especially considering the sharp fluctuations in recent years”, – agrees analyst of Forex Club.

“In our opinion, a reaction to increasing US interest rates may be hike in the dollar to the level of 60 rubles, but after a while, the dollar may again return to the corridor 58-59 rubles,” – said the expert of “Alpari”.

But in the long run the March rate hike by the fed plus the increase in 2-3 times to the end of the year will still be to create the conditions for the weakening of the ruble. “Especially if the Bank of Russia will decide on additional monetary policy easing,” adds Afanasiev. The reduction in the rate of the Russian regulator could happen very soon – if at the meeting of the Board of Directors of the Central Bank on March 24 will be lowered interest rate, then this event may have on the ruble is a much more serious impact than the fed rate hike, said Milchakova.

“In this scenario, the ruble will become a less attractive currency in the framework of the strategy carry trade. According to some estimates, this factor is currently the main driver of strengthening of rouble” – sums up Afanasyeva.

If to speak about the economic consequences, it is indirectly through the impact of the dollar on oil prices, fed may put pressure on oil and gas revenues of the Russian budget. However, expectations of increasing the budget and growth of the Russian economy for this year remain positive.

Although expenditure on social policy in the beginning of the year increased substantially, the budget deficit in January–February was moderate (1.2% of GDP) against the background of a significant increase in oil and gas revenues, says senior analyst of “URALSIB” Alexey Devyatov. And even in the coming months if oil prices will moderately decline, the Federal budget, according to him, will continue to receive additional income (compared with the budgeted figures). According to the forecast Devyatova at year-end average price of Brent oil will be 50 dollars per barrel (versus $ 40 budgeted), and the Russian economy will grow by 1.9%.


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