EM FX Weekly – Ruble outperforms

by: Georgette Boele , Roy Teo , Peter de Bruin , Marijke Zewuster

EM-FX-weekly-18-June-2015.pdf (110 KB)
  • Russian ruble outperforms and CBR cuts rates by 100bps to 11.5%, resumes FX purchases
  • More negative on the Brazilian real
  • Asian currencies lacking direction




Russian ruble outperforms

This week the Russian ruble was the best performing emerging market currency mainly because Brent oil prices had some upward momentum. Earlier in the week, the Central Bank of Russia (CBR) cut its key rate by 100bps to 11.5%. Since the end of last year, when Russia was in the midst of a financial crisis that forced the CBR to hike rates to 17% to defend the ruble, rates have been lowered by a cumulative 5.5 percentage points. The central bank signaled that the pace of monetary easing is likely to moderate a bit going forward as inflation expectations could become dislodged. Inflation, while starting to come down, is still high, at 15.8% in May. Another reason that could prompt the CBR to be cautious in reducing rates is that it is continuing its FX purchases at a daily pace of around $200 million. This also leads to a looser policy stance. However, with the economy falling ever deeper into recession, we think that the central bank will be forced to continue loosening policy. As such, we expect CBR’s key rate to be cut to 9% at the end of this year. As the CBR’s decision was expected, it did not affect the ruble.


More weakness in Brazilian real

We have adjusted our GDP forecasts for Brazil for Q2 downwards (see our Brazil Watch: Growth Down, inflation up). The first data available for Q2 point to a deeper recession. Despite the sharp economic slowdown, inflation continues to rise in almost every category, reaching 8.5% yoy in May, up from 8.2% in April. Most of the price increase is due to the fiscal adjustment that is currently taking place. The central bank has remained vigilant. Therefore, one or two more rate hikes are likely in our view. Meanwhile, the central bank has signalled via lower interventions that it is comfortable with a possible weakening of the real. To take all the above into account, we now expect a further weakening of the real versus the US dollar in 2016. Our new year-end 2016 forecast is 3.4 in USD/BRL.

Asian currencies lacking direction

Asian currencies lacked direction in the past week. The Singapore dollar, given its high sensitive to interest rates in the US, gained due to market expectations that the Fed will raise interest rates at a slower pace. The outlook for the South Korean won remains weak as concerns linger that the Middle East respiratory syndrome (MERS) outbreak will hurt household consumption and the service sector. Separately, short term volatility expectations in the onshore Chinese yuan have declined to the lowest level since 2010. Market expectations are that the Chinese authorities will keep the yuan stable ahead of the upcoming IMF review on the yuan inclusion in the SDR basket. Looking ahead, we maintain our slightly bearish view that the yuan will decline towards 6.30 against the USD later this year based on economic fundamentals.