23.10.2020

Why the ruble to strengthen by the end of the year

Now, oil prices continue to fall, global volatility is enhanced by the collapse of the global stock indices, but the rate of the ruble to the dollar, nevertheless, is fair levels. This is reflected in the current ruble price of oil, which is 4470 roubles – such was the price of a barrel of Brent before in early August, the US announced a second round of sanctions.

We expect that by the end of November the exchange rate of the dollar against the ruble can drop to 65.5 ruble and below, and by the end of the year to 64 rubles. If this period is still to be punched mark 66 rubles per dollar, the next important support level will be the course 65,73 rubles per dollar.

Support from oil and geopolitics

Until the beginning of August Brent futures traded above $70 a barrel. In early October, oil has risen to $85 per barrel. Despite the fact that hydrocarbons from mid-August to early October increased in price by 22%, the average rate of the Russian currency against the dollar amounted to more than 67.5 per ruble.

Meanwhile, with such prices for oil the currency pair dollar-ruble was supposed to be in the range of 62-63 of the ruble, that is, the risk premium at that time was about 5-6 rubles (8-9%). This implies that at current oil prices of $68 per barrel and the current risk premium rate of the ruble to the dollar should be 71-72 of the ruble.

Scenario analysis (fair value)

Source: Bloomberg, ITI Capital

A further recovery of the correlation between oil prices and the ruble will support Russian currency against the dollar.

Now, as we see in the graphs, the relationship between exchange rate and oil prices is very weak. The 120-day correlation is less than 10%, and we see a trend towards further decrease. When oil prices peaked in the end of 2014, the 120-day correlation of the ruble and oil prices were less than 25%.
Correlation of the ruble to the oil

Source: Bloomberg, ITI Capital

So the level of short-term correlation is still very low. If in August-September this was due to the prospect of new sanctions and the global drop in demand for risky assets, and now we see that non-residents are not in a hurry to sell the paper ruble – they were encouraged by the postponement of new sanctions. However, this delay does not reduce the threat of introduction of relatively stringent restrictions.

In addition to restoring the relationship between the ruble and the oil-catalyst of strengthening of the Russian currency could become the signing of new trade agreements between the US and China during the G20 summit in late November – early December and tax payments in Russia (the tax payers to step up to the 25 November).

According to our calculations, the total amount of tax payments will amount to about 1.3 trillion roubles, and the sale of the relevant amounts of foreign currency in excess of $6 billion in the absence of demand, the Central Bank should have a positive effect on the ruble.

One thought on “Why the ruble to strengthen by the end of the year

  1. Hmm is anyone else having problems with the images on this blog loading? I’m trying to determine if its a problem on my end or if it’s the blog. Any feed-back would be greatly appreciated.

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