Panic attacks: why the market is overestimating the bad news for the ruble

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By the end of the year the Russian currency may again become attractive for the players

The Russian ruble is now under pressure due to global sell-off of currencies and assets in emerging markets on expectations of the rate hike, the fed, and also because of the sharp rise in yields of US Treasury bonds, which reduces the attractiveness of the popular players have a strategy of carry-trade (playing on the difference in interest rates on different currencies) against the dollar.

The index of the dollar against a basket of major currencies reached the highs since the beginning of February 2016, when the world expected a series of rate increases by the Fed. The people’s Bank of China weakened the yuan to its lowest in eight years. Financial investors and speculators have begun to exit positions in higher-yielding currencies including South African Rand, Brazilian real and Russian ruble.

The risk of uncertainty of future fiscal and monetary policy of the United States exceeded considerations of profitability from foreign exchange transactions. The index of the carry-trade, Bloomberg calculated in eight currencies (including the ruble) with their interest rates against the dollar and the dollar rates fell last week by 5.4%.

The fed and the trump factor

Not to say that the drop in prices of U.S. Treasury bonds came as a surprise to markets. The fed’s rate hikes at the end of 2016 was predicted for a long time and laid many in the trading strategy. Fed Chairman Janet Yellen in a recent report to Congress indicated that a rate hike may be appropriate “relatively soon”. And statements of newly elected President Donald trump about increasing spending on infrastructure and military-industrial complex provoked a sharper-than-expected rise in yields of dollar-denominated bonds. It is clear that the growth of spending requires more borrowing and increases inflation expectations in the United States. Rising inflation and unemployment, which can be reduced by implementing a new program, provide guidelines for the fed in regulating interest rates.

In addition, relatively recently the Deputy head of the Federal reserve Stanley Fischer said that the increase in government spending by 1% of GDP entails an increase in rates by 0.5%.

Market participants came to realize that the era of low interest rates and a surplus of dollars coming to an end. The shortage of dollar liquidity is already affecting the behaviour of global financial markets. The risk of uncertainty of future fiscal and monetary policy of the United States exceeded considerations of return from carry-trade.

Investors have not forgotten how last year’s attempt by the fed to begin the rate hike cycle and relate these to the levels and growth rates for inflation and condition of the U.S. labor market ended with a Grand fall of stock and commodity markets around the world, as well as a sharp strengthening of the dollar and competitive devaluation of currencies of countries — trading partners of the United States. All this was accompanied by a massive outflow of capital from China, the EU and several developing economies and can happen again.

Equally severe shocks can wait for now.

Really have to say goodbye to strategies of carry-trade in higher-yielding currencies against the dollar? And what in this case, the prospects of the Russian currency?

Remember the ruble

Usually, the panic in the markets lasts for a limited time. At the end of June Brexit also brought down the indices, but after a more careful analysis of the situation stock markets and world currency returned to previous levels.

Want to reduce risks basically did. The December fed rate hike at the next 0.25% of already taken into account by all investors. The main question now is how many rounds of interest rate increases ahead, and how quickly you begin to embody the initiative of Donald trump?

However, Stanley Fischer, speaking on 11 November at a conference in Santiago, said that rates will rise slower than it was in the past, which will mitigate the impact on the markets. As for the initiatives of President trump, the prior to implementation may take a long time. He still needs to form a team and become a full owner of the White house that will only happen at the end of January 2017, and the nomination and discussion of legislative initiatives in the area of budget policy — business not one week or month.

The US national debt already exceeds $19,8 trillion. Regardless of that, there are approved a new fiscal stimulus or not, the service of such obligations is required to limit the levels of interest rates on government securities. Therefore, when making future decisions on interest rates, the fed will be the primary non-target inflation, and economic growth and productivity that allows us to estimate budget revenues and make monetary policy more accommodative.

All this means that now global markets overestimate the risk of a sharp growth rates in the U.S. next year and soon investors will again have to remember the ruble, especially as the Russian currency is one of the most attractive emerging markets given the high level of the difference in rates and also due to low dependence on external borrowings, after three years of sanctions.

Note also that the Russian market has grown on the news of the election results in the United States, since the advent of the new administration increases the chances for the normalization of relations between the two countries and even the removal of Western sanctions. It is not taken into account in the quotations of the ruble, but foreign players are likely to remember it. It is possible that the ruble in the next few days will stop falling and stabiliziruemost near the mark at 64 rubles per dollar.

Chance on expensive oil

There is one last but very important factor influencing the exchange rate of the Russian currency — oil. The reaction of oil futures are now no different from other financial markets. Speculators increased short positions in oil by 3.5 times since mid-October, once again bringing the number of shorts to multi-year highs, as in the end of last year.

The fall of Brent prices in the range of $44-46 may force OPEC to still comply with the agreement on quotas. If the production cuts will take place as planned from December 1, speculative shorts of hedge funds in oil futures will be quickly closed and oil prices accelerate to the upside. Ruble in this case may briefly return to 62-63 levels in rubles per dollar, but then its dynamics will depend on the monetary policy of the fed. The oil factor may have an impact in the long term, if the balance of demand and supply in the market of hydrocarbons will be achieved by mid-2017. In addition, the US may be less than you would monitor the situation in the middle East, which threatens the middle Eastern monarchies uncertainty, mired in the conflicts in Syria, Iraq, Yemen and Libya. It can also push oil prices up. And financial capital, faced with new risks in the global markets, now will be extremely cautious in granting new loans shale projects in the United States.

The ruble is generally positive, so don’t panic and wait for a significant devaluation to the end of 2016. On the contrary, it is time to look at Russian stocks and bonds and not to miss the moment when foreign investors once again begin to come into ruble assets.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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