EM FX Weekly – The ruble’s recovery

by: Roy Teo , Georgette Boele

EM-FX-weekly-10-April-2015.pdf ()
  • Sentiment in the Russian ruble improved
  • Asian central banks intervene in different directions
  • SGD to ease to 1.40 against the USD as the MAS is likely to adjust the S$NEER band

Investor sentiment towards the RUB improved

In general, investor sentiment towards emerging market currencies has improved since the Fed meeting on 18 March as the US dollar rally came to a halt and 10y US Treasury yield dropped. The currencies  that have been beaten up the most such as Russian ruble and Brazilian real profited substantially. Moreover, they have been resilient despite the US dollar rebound. This week the Russian ruble rallied by more than 5%. A sharp recovery in investor sentiment towards Russia and stabilization of the price of oil resulted in a sharp drop in 5y sovereign CDS spread and a rally in the ruble (see graph below). We think that the central bank will further ease monetary policy to stimulate the economy. The Brazilian real was the runner up last week for similar reasons.

150410 - EM FX -1

Asian central banks intervene in different directions

In Asia, the Indonesian rupiah (IDR) recovered due to market speculation that the central bank is less tolerant of weakness in the currency. Indeed, Bank Indonesia’s foreign currency reserves declined by USD 3.9bn in March as the central bank supported the IDR. The Indian rupee (INR) was also supported after Moody’s had upgraded India’s rating outlook from stable to positive. Data from the Reserve Bank of India showed that the central bank increased their net purchases of US dollars from USD 1.4bn in September 2014 to USD 12.1bn in January 2015. We judge that this was in an attempt to slow the gains in the INR against its trade weighted basket of currencies as the resilient INR has exerted strain on exporters’ margins.

Monetary Authority of Singapore monetary policy decision

We expect further monetary policy easing by the Monetary Authority Singapore next week (14 April). It will likely be in the form of re-centering the Singapore dollar nominal effective exchange rate (S$NEER) policy band lower so that the Singapore dollar has room to weaken. We have already communicated this view in our FX Watch – SGD – further easing on the cards, which was published on 3 February 2015. In January this year, core inflation in 2015 was downgraded substantially from 2-3% to 0.5-1.5%, the lowest level since early 2010.  In fact, core inflation could come in lower than 0.5% in the coming months. This is because the second round effects of lower energy prices filtering through the economy. FX reserves declined by almost 10% from September 2014 to March 2015 because the central bank defended the Singapore dollar to avoid further weakness. We think that the S$NEER is trading at the lower end of the policy band. By re-centering the policy band lower, the MAS is less obliged to intervene in the currency market to defend the SGD. Given Singapore’s open economy, core inflation is expected to rise gradually as energy prices recover and global growth accelerates later this year. Hence a gradual appreciation in the S$NEER to curb imported inflation remains necessary. We expect the SGD to decline to 1.40 against the US dollar later this year.