The ruble is following its upside momentum, currently trading below 65 ruble for a single dollar note. Things are looking up for the country as its economic prospects show definite signs of improvement. July’s inflation data plunged to its lowest level in 2 years – to 7.2% y/y for July. It would appear that Elvira Nabiullina’s monetary policy strategy is paying off. Moreover, the head of the Russian Central Bank has made clear that one of her primary objectives is to increase gold and FX reserves up to $500 billion in an effort to back its currency in gold as much as possible.
This appears to be a smart move considering the current context of global uncertainty and the strategy is, in our view, definitely helping Russia to attract investors. Last Thursday, Russian gold and FX Reserves have been released at $396.4 billion and are showing a continued increase towards the central bank’s target. For the time being, money is flowing into the ruble whereas oil is still trading at low levels, despite a continued rebound. The correlation between oil and ruble is diminishing. In fact, we believe that oil prices are not even the market’s main focus at present. From our vantage point, current ruble inflows rather comes down to a loss of central bank control.
For example, the Bank of England, earlier last week cut its rate for the first time in seven years and announced that the asset purchase program target is to be largely increased. Money will continue flowing into the financial markets and as a result we believe that investors will, more than even, look for yields wherever it can. The structure of the markets is definitely changing. Stocks are now being bought for dividend yields, while bonds are being bought for capital appreciation. This is why we are seeing inflows in RUB.
The Russian currency is then strengthening and this overall increase needs to be monitored. For this reason we believe that it is likely that the Russian central bank will ease again at its September monetary policy meeting. The last rate cut happened in June when rates were lowered to 10.50% from 11%. We now expect a cut towards 10% – a rate that anyway cannot currently be achieved anywhere else in the markets. The RUB is definitely a good carry trade and should continue to appreciate. RUB is now taking on a kind of yields safe haven status.