RUB has sold off strongly recently, for a total decline of 15% against the basket and 17% against the dollar since the end of July, breaking through the psychological barriers of 32 to the dollar and 37 to the basket and pushing against the upward edge of the corridor.
A general EM sell-off is to blame: We see this as driven by a general switch out of EM currencies and into the dollar, reflecting global risk-aversion. In turn, this switch out of ruble assets has driven a decline in domestic liquidity, and a fall in the RUB.
CBR allowed the RUB to cross the corridor… In response to the sell-off, the CBR barely intervened, in line with its exchange rate regime, allowing 15% of depreciation for a reserves loss of maximum US$5 billion (1%). This allowed the CBR to prioritise providing domestic liquidity over defending the RUB.
We see a three-phase rebound in the RUB:
- In the first phase as the risk-off trade continues, the CBR will be selling dollars and moving the corridor up. It may keep grinding up to a near-term peak in the 37.70-37.90 range.
- When markets settle, we see a relatively rapid climb by the RUB back towards the no intervention zone, which will probably by that time be approximately in the 34.50-35.50 range. However, elevated capital flows and the relatively low levels of CBR intervention imply heightened volatility.
- We think then that some positive domestic development will be required to transition to the third phase, which will require capital outflows to fall back, so that the strong trade balance can reassert itself. We see the most credible catalyst for this change in sentiment being the election of the new president in March 2012 and the formation of the new government in May 2012.
Our call is therefore:
35 RUBBSKT by year-end, which is 30.8 RUBUSD and 40.1 RUBEUR at EURUSD 1.30 by year-end.
33 RUBBSKT by June 2012, which is 29.3 RUBUSD and 37.5 RUBEUR at EURUSD 1.28 by June 2012.
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MORGAN STANLEY
SALES AND TRADING