HE end of last week, the Russian central bank chose to cut interest rates by 25 basis points to encourage loan growth and stimulate the economy – despite mounting concerns about inflationary pressures.
Bank Rossii has been making it increasingly clear that the monetary easing cycle is now slowing. Indeed, finance minister Alexei Kudrin signalled on Friday that there was at least a small risk of a hike in rates this year.
Such a shift in central bank policy would normally be a good opportunity for foreign exchange traders to jump into the market in search of a profit, but historically it has been extremely difficult for individual traders to play the Russian rouble, which is not free floating.
But Swiss-based foreign exchange provider ACM has recently launched a US dollar-Russian rouble currency pair that is available to all its clients, whether they are private investors or institutional traders.
ACM’s standard account, which requires a minimum deposit of $5,000, has a spread of 230 basis points on the pair. Saxo Bank also offers spreads on both dollar-rouble and euro-rouble, and the minimum trade size is €5,000 and $5,000 respectively and the margin requirement is 8 per cent.
But with Bank Rossii shifting slowly towards a floating exchange rate regime – the rouble is currently managed via an effective basket peg (weighted 55 per cent US dollar and 45 per cent euro) – what might appear like an expensive play now could yield proportionately higher returns over the next year or so.
So if you’re not put off by the spread, how should you go about playing the rouble? In general, traders should be looking to go long on the rouble against the US dollar. Analysts at UBS think that the rouble is 25 per cent undervalued despite having gained 6 per cent against the euro/dollar basket since the start of the year.
And with crude oil currently trading at around $85, the rouble is still fundamentally strong, say analysts at Societe Generale: “Until the current account declines closer to zero – and with oil above $80 a barrel, that is a question of late 2011 – it will continue to push the basket lower.”
Currency traders looking at the rouble should pay attention to commodity prices, since commodities make up 85 per cent of Russia’s exports. Societe Generale adds: “Any prolonged fall in the oil price would lead to distress in domestic financial markets and push the economy back into recession. The critical oil price – the Urals price at which the current account would be close to zero – is continuously rising.”
The world oil price will need to stay above the critical Urals level for Russia to balance its current account. A deterioration in the world oil price will reduce the value of exports and reduce the government’s fiscal capabilities.
There are also clear signs that the Russian central bank is liberalising the FX regime and moving to a more market-driven exchange rate, says Julia Tsepliaeva, BNP Paribas’ chief economist for Russia. She points out that in 2009, the bank widened its official corridor for the rouble to 26-41 against the basket and spoke approvingly of large fluctuations within this trading band.
While the large spread will make it difficult, if not impossible, for individuals to make money from playing large daily moves in the currency, the greater flexibility indicates that at some point this year, we will see further liberalisation in the currency.
This is expected to cause a gradual appreciation in the rouble against the basket and a short dollar-rouble trade now when the currency is close to the bottom of its official trading range should pay dividends.