The Ruble has been the worst performing currency in the expanded majors’ space this week, falling more than 5% versus the USD and the EUR. If you thought things were bad for the RUB on the back of the Western sanctions, yesterday’s news that Opec would not cut its Crude Oil production was another hammer blow to the RUB.
RUB and oil
Interestingly the RUB had rallied at the early part of this week ahead of the OPEC decision; however the aggressive sell off since Thursday has pushed USDRUB to key resistance at 50.00. This is another record high, which could make life difficult for the central bank. As you can see in chart 1, the RUB has a strong correlation to the oil price, and its future direction could depend on where crude goes next.
On a long-term basis, the correlation between the RUB and oil is statistically insignificant, however on a short term basis it has strengthened and this past week the RUB has moved with the oil price over 70% of the time. This contrasts with other commodity currencies like the NOK, which only had a 50% correlation with oil during this week of Opec meetings in Vienna.
We can use this data to come to a few conclusions:
1) the RUB is the most sensitive of the expanded majors to movements in the oil price, even more than the Norwegian krone.
2) due to the aggressive re-coupling of oil and the RUB in the last few days, we could see this relationship persist for some time. Thus, as long as the oil price falls, the RUB could come under pressure.
The falling RUB and intervention fears:
Earlier this month the Russian central bank announced a series of changes to its exchange rate policy that essentially amounted to allowing the RUB to float-freely, previously the RUB was managed, which meant it could only move within a limited band each day. However, now the central bank has disbanded this policy, and has said that it will only intervene in the market by $350mn per day, which is about 1/8th the size of its previous interventions. However, the central bank has said that it will reserve any larger interventions for fighting “financial stability threats”.
This is why we would urge caution in the short term, as the sharp decline in the RUB could be characterised as a financial stability threat, which may trigger larger interventions from the Russian central bank and unexpected, volatile moves in the Russian currency.
Where could USDRUB go next?
We believe that the Russian authorities will want to defend the 50.00 level in USDRUB, which should act as a stiff level of resistance. This could trigger some volatility in the short term. Although USDRUB looks overbought, the technical signs still suggest there could be further upside unless we get a powerful response from the Russian authorities.
In the event of intervention from the central bank, we could see some short-term downside. As USDRUB has moved so sharply in recent days, traders should focus on the psychologically-significant round 100-pip handles at 47.00 and 48.00 as key levels of support in the coming days. If oil is able to stabilize and make a recovery then watch 46.34, the 23.6% retracement of the bull trend from July – today. If there is no central bank intervention then we could see the market attempt to take the 50.00 level, opening the way to 51.00 and 52.00 in the near-term.
Source: Bloomberg. THIS CHART DOES NOT REPRESENT THE PRICES OFFERED BY FOREX.com
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