USDRUB runs to the sky – RCB strike fast (unsuccessfully)

Emerging market currencies were yesterday’s focus, with the major headline being the USDRUB appreciating from 57.9203 to a historic high of 63.6773. The Russian Central Bank (RCB) moved fast in another attempt to strengthen the Ruble, by raising interest rates overnight from 10.5% to an incredible 17%. However, as has been the case with the RCB’s previous attempts to strengthen the Ruble, even the incredible rate hike only encouraged short-term strength. The USDRUB pulled back to around 60.7316 as the European session commenced, only to appreciate to a further historic high, 66.8033 at the time of writing.

The RCB are now acting tirelessly to strengthen the Ruble after it weakened by around 50% against the US Dollar in recent months, but with the current economic conditions being so heavily stacked against Russia – the RCB continues to face an uphill task at preventing the Ruble from declining further. The Ruble decline we are noticing is not just a result of the economic sanctions anymore, the freefall in the oil markets is accelerating the Ruble decline. Until the oil bears dig themselves a floor for oil (and they still haven’t) this also means there is no ceiling in place for the Ruble weakness.

Many are seeing the prospect of a recession for Russia next year as inevitable, and this has not even been priced in the Ruble yet. This is just going to spell even more trouble for the RCB down the road in the upcoming future. The only variable that can help the RCB right now is if the USD becomes widely sold. This also means Ruble bulls need to either hope for horrendous winter weather conditions to return to the US for the second straight year, or that the Federal Reserve will postpone raising interest rates next year. Unless the Federal Reserve are also spooked by the drop in oil, I do not see it delaying hiking interest rates because it would also likely encourage further profit-taking in the stock markets.

Either way, the USD being widely sold is the only way I can see the oil markets making a recovery, which would be music to the ears of the RCB.

As trading is continuing to commence in Europe, global equity markets are pointing to the downside. This could be pointed towards the continuation of resurfacing fears over the global economy, but the more likely reason for the recent weakness is probably the drop in oil. The only global stock that is pointing to the upside this morning is the Shanghai Stock Exchange Composite Index, which many would look at as unexpected bearing in mind there was an unexpected PMI manufacturing contraction overnight. The reason for the strength is because the manufacturing contraction is being seen as a clear indication that the People’s Bank of China (PBoC) will be pushed into increasing further stimulus into the Chinese economy sooner rather than later.

Overall, the combination of equity markets facing pressure and repeated concerns over China are leading to investors being attracted to the JPY as a safe-haven asset. The USDJPY has now opened the week with a 250 pip loss and if the pair continues to move towards the downside, further support can be seen at 116 and 115.550.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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