I wrote on this blog several times over the last few months that the ruble was a short and long term buy for investors and traders alike. The last time was when the Russian currency was around $60 to the U.S. dollar at the end of the fourth quarter. There were many buying opportunities at the end of 2014 and earlier this year; the ruble actually hit approximately 80 at one point when panic was in the air in Moscow and Russians were buying televisions and cars to protect their wealth.
That time is over.
With the ruble briefly breaking 50 and rebounding a few points higher to a trading range between 51 and 52 to the dollar, short term traders need to take profits. If you own rubles, buy something else, like euros.
Here is why I think the ruble will lose value.
- The Central Bank of Russia said it would. Yes, you heard me correctly. Central bank president, Elvira Nabiullina, recently stated that interest rates could be reduced. She had hiked them to 18% during the height of the crisis and later reduced them 2% to appease the oligarchs. With the main currency crisis mostly behind her, she will reduce rates even further to help the economy. This will put downward pressure on the currency. There is significant economic pressure on the central bank right now. The Russian economy is hurting and will not get any better any time soon. The high interest rates are really squeezing business and the housing market.Russia is in a significant recession. The pressure to ease rates won’t abate in the near term.
- The ruble has hit near term resistance. If you look at the chart, this is where we most likely will consolidate before another move to the downside. That downward move could possibly be a buying opportunity depending on the severity of the sell-off.
- The Moscow Times reported that most Russian exporters had finished converting their dollars and other foreign currencies to rubles, per the Russian government’s directive, for the quarter. This means less support for the currency until three months from now when the cycle repeats itself.
Here is what The Moscow Times reported this week…
The Russian ruble weakened on Monday after opening stronger against the dollar and the euro, and analysts said there was little to drive it higher amid broad expectations of a key rate cut later in the week.
“Most likely … the national currency will move towards weakening at the start of the week,” Pavel Shchipanov, head analyst at Romanov Capital investment house in Moscow, said in a note.
According to a Reuters poll, Russian exporters are still to pay some 900 billion rubles ($17.40 billion) in monthly taxes this week, but Shchipanov said he believed that most had converted their revenues already last week.
Oil, which on Monday held near a 4-month high, is unlikely to rise much further and lend support to the Russian currency, he added.
This does not mean I think that Russian assets themselves are overvalued, quite the contrary. Russian bonds, real estate and certain sectors of the equity markets are extremely attractive. Yes it is risky but investors who get involved now in Russia will be very happy 3-5 years from now in my humble opinion.
I am simply highlighting the fact that in the short term, the ruble will most likely sell-off for a while.
L.Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com