24 Mar 2015
Russian ruble keeps the neutral bias – JP Morgan
FXStreet (Edinburgh) - In the view of analysts at JP Morgan, the outlook on the Russian currency remains neutral.
Key Quotes
“RUB has been the best performing EM currency this month despite the fall in oil prices and CBR rate cuts”.
“One factor that may help explain this is RUB's valuation relative to oil and its 5yr CDS, with the currency already screening cheap against these variables, giving it a valuation buffer”.
“The lack of negative news headlines surrounding geopolitical tensions in Ukraine also likely helped reduced the risk premia demanded by locals and foreign investors. This helps explain the relative stability of RUB even after the CBR’s 100bp rate cut (less than expected)”.
“More broadly, in our framework for analyzing the RUB, we have always maintained that in the absence of a disorderly demand for FX from locals, the RUB screened undervalued on most metrics”.
“We argued for example that corporates have enough FX assets to finance their FX liabilities over the next year and that the real risk to the RUB was (and continues to be) from a deterioration in locals’ sentiment towards the currency, prompting hoarding of FX by corporates and dollarization by households”.
“This deterioration in sentiment may be triggered by a more aggressive fall in oil or further financial restrictions as geopolitical tensions worsen”.
“In the absence of these factors however then the improvement in Russia’s current account given the REER depreciation and compression in domestic demand is likely to supply the economy with enough FX over the medium run to keep the currency stable”.
“Overall, with continued uncertainty over the direction of oil in the short term, geopolitical tensions still running high and further rate cuts from the CBR likely, we prefer to remain neutral RUB for now”.
Key Quotes
“RUB has been the best performing EM currency this month despite the fall in oil prices and CBR rate cuts”.
“One factor that may help explain this is RUB's valuation relative to oil and its 5yr CDS, with the currency already screening cheap against these variables, giving it a valuation buffer”.
“The lack of negative news headlines surrounding geopolitical tensions in Ukraine also likely helped reduced the risk premia demanded by locals and foreign investors. This helps explain the relative stability of RUB even after the CBR’s 100bp rate cut (less than expected)”.
“More broadly, in our framework for analyzing the RUB, we have always maintained that in the absence of a disorderly demand for FX from locals, the RUB screened undervalued on most metrics”.
“We argued for example that corporates have enough FX assets to finance their FX liabilities over the next year and that the real risk to the RUB was (and continues to be) from a deterioration in locals’ sentiment towards the currency, prompting hoarding of FX by corporates and dollarization by households”.
“This deterioration in sentiment may be triggered by a more aggressive fall in oil or further financial restrictions as geopolitical tensions worsen”.
“In the absence of these factors however then the improvement in Russia’s current account given the REER depreciation and compression in domestic demand is likely to supply the economy with enough FX over the medium run to keep the currency stable”.
“Overall, with continued uncertainty over the direction of oil in the short term, geopolitical tensions still running high and further rate cuts from the CBR likely, we prefer to remain neutral RUB for now”.