Russian Currency In CrisisMarket Outlook By Pepper Stone, Posted on December 17, 2014
Russia and the Ruble are firmly in crisis mode, after a laconic 100 basis point increase in the CBR’s interest rate failed to satisfy market participants. Since the central bank meeting, the Ruble has plummeted by over 20% against the US Dollar and the CBR has been forced to raise interest rates drastically to 17.00%, up from 10.50%.
Since the surprise rate increase, which sparked a short covering rally, sellers have come in force to the market as banks have moved to stop providing liquidity due to the risks involved. Because of the lower liquidity, spreads on Ruble pairs are much wider than normal and market movements are excessively volatile. Many brokers and banks have now ceased to provide a market for the currency as confidence wanes in the oil exporter’s ability to manage its monetary affairs.
USD/RUB rose to above 76, reaching even 80 on some platforms – indicating the lack of liquidity in the market. This year’s falls in the Ruble have been driven largely by falling oil prices and international sanctions. When an emerging market economy faces a depreciating currency it can cause a crisis in two ways; firstly, when a managed exchange rate regime is overwhelmed by persistent market pressure selling that currency and; secondly due to the tendency of emerging market economies to take on debt issuance in foreign currencies – predominantly in US dollars.While the Ruble has already succumbed to the first form of crisis, in that the managed exchange rate has given way to a more freely floating currency. The second form of crisis has not yet occurred, but Credit Default Spreads indicate that the Russian default rate has increased substantially – in excess of 30% according to market implied rates. This is occurring because Russia has a large portion of its external debt based in US dollars, making the coupon and principal payments more expensive as the Ruble falls lower – a vicious cycle which results in further selling of the Ruble. While the country does have substantial FX reserves with which it might make payments, the market is clearly taking the risk quite seriously. Echoes of the 1998 Russian crisis come to mind, and all eyes are on this currency pair, for which the market is drying up.
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