One of the major talking points throughout the currency markets at the moment surrounds the Ruble, with the currency having weakened by nearly 40% against the USD over the past six months. Previously, the major contributor behind the Ruble decline was the economic sanctions place on Russia following the geo-political conflict. However, in recent weeks the Ruble decline has accelerated aggressively and this time, economic sanctions have not been the major driving force. The contributing factor behind the intense weakness more recently has been freefalling commodity prices, with Crude Oil having lost over 30% of its own value since July.
The widespread weakness in the Ruble has inspired the Central Bank of Russia (CBR) to introduce currency intervention in an attempt to strengthen the currency and lower import costs. The issue here is that the current economic conditions are so heavily stacked against the Russian economy, it will be difficult to strengthen a currency that weakened to a record low 54 to the US Dollar on the 3rd December 2014. Not only are economic sanctions going to cost the economy around $40bn a year, but falling Oil prices will cost the economy a further $100bn. This will continue to weigh on the Ruble and when you combine these factors alongside the Economy Ministry announcement that Russia will enter a recession next year, the CBR are going to continue facing difficulties with a weak Ruble.
In order for the CBR’s task in rebalancing the Ruble to become easier, Oil prices need to find a “bottom”. Fortunately for the CBR, some indications of this are emerging. For example, despite demand for the USD surging after it was announced the US economy added an incredible 321,000 jobs during November, the Oil markets were left largely unchanged. They felt some pressure as you would expect with a stronger USD, but Crude Oil only declined by around $1. Crude also appears to have found some support at $66.70 and as long as the price of Crude doesn’t extend below this area, it will prevent the Ruble from weakening further.
If the commodity markets are able to reverse losses, this would really assist the CBR in rebalancing the Ruble. In order for commodities to begin reversing losses, attraction for the USD needs to weaken. This is possible because although demand for the USD has intensified on the expectation the Federal Reserve will begin raising US interest rates sooner than expected, this still appears unlikely. Recent statements from the Federal Reserve indicate it remains concerned with slowing global growth and with questions over global prospects likely to continue, the Fed are likely to maintain that regardless of strong data - no rate rises can be expected until at least the middle of next year.
This would encourage investors to close positions and take profit on the USD, subsequently strengthening the Ruble. There is another factor that could help the Ruble strengthen, but this remains an outside chance. Around Christmas 2014, the United States encountered its worst winter weather period for decades. This led to the worst US economic contraction for three years and flattened demand for the USD. Some indications of winter weather appearing in the United States during November were noticed, so investors should keep an eye on this. If the United States welcomes similar weather conditions to last year, any plans to raise US interest rates would be delayed. This would encourage USD weakness, and represent a welcome opportunity for the CBR to sell Dollars and rebalance the Ruble.