The Russian ruble has been one of the most volatile emerging market currencies in recent years, and it ended this trading week in much the same way. On Friday, USD/RUB’s high-low range ran close to 1.1 rubles, marking the Russian currency’s most volatile session since July.
Yesterday’s excitement in USD/RUB was largely the result of the meeting of Russia’s central bank, at which the one-week interest rate was lowered to 8.25%, from 8.5%. It was the fifth time this year that the bank had reduced the cost of borrowing. The decision was widely expected after inflation fell to 3% in September – well below the central bank’s 4% target.
Ordinarily, an anticipated rate cut (or hike) would minimally impact foreign exchange rates, but after this one, USD/RUB climbed 1.6% to 58.707. To put that move into perspective, it would have marked the ruble’s largest one-day fall since June and it also took the currency to its weakest level against the dollar in eight weeks. It would have, but it didn’t.
Ruble weakness didn’t stick. A dramatic shift in ruble sentiment began around 8:30am in New York as American investors favoured foreign currencies. In the eight hours leading up to the week’s close, the ruble managed to claw back 75% of its aforementioned losses, with USD/RUB settling at 58.0135.
The ruble’s fightback on Friday was impressive given that the dollar should have benefitted, in theory, from much better-than-expected economic data. In reality, currency traders shrugged off positive news of 3% US economic growth (2.6% expected) in favour of news that President Trump was likely to pencil in Jerome Powell as the next head of the Federal Reserve, fuelling the idea that US interest rates might climb more slowly than markets have been anticipating.
Against the dollar, the ruble now stands close to the midpoint of its 2014-2017 range. The Russian currency has appreciated nearly 50% against the greenback since January 2016’s high of 85.84, although that masks to a great extent its move to that level from sub-33 rates in 2014. Overall, since 2014, the ruble has lost 44% of its value.
Against the euro, as with the dollar, the ruble rallied strongly in Friday’s New York session and ended the day little changed at 67.409 after earlier rate cut-induced weakness. Since 2014, the ruble has lost a third of its value against the single currency.
As for the future of monetary policy in Russia, interest rates will continue to fall, “but modestly so,” thinks Citi economist Ivan Tchakarov. The economist thinks that the central bank will switch from “hawkish cuts,” or what some describe as a “moderately tight” bias, to a neutral bias sometime in 2019.
Despite this year’s cuts, among the twenty-six most advanced economies of the world, Russia continues to have the highest interest rates. 8.25% compares with a median bank rate of just 1.375%. Sub-8% rates haven’t been seen in Russia since mid-2014.