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US dollar, euro surge to new record highs vs Russian ruble

November 07, 2014, 14:46 UTC+3 MOSCOW
The euro rose to a new record high of over 60 rubles in early Moscow trading on Friday while the US dollar climbed above 48.6
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© TASS/Sergei Fadeichev

MOSCOW, November 7. /TASS/. The Russian currency continues depreciating on the domestic foreign exchange market amid falling world oil prices and increased geopolitical tensions.

The euro rose to a new record high of over 60 rubles in early Moscow trading on Friday while the US dollar climbed above 48.6.

Financiers say the Russian foreign currency market is close to panicking, which is largely caused by the population’s heightened demand for foreign exchange rather than by geopolitical factors.

The US dollar exceeded 47 rubles on Friday’s opening on the Moscow Exchange, subsequently climbing by 1.27 rubles to 48 and further to 48.6 by 11:30am Moscow time (08:30 GMT). Meanwhile, the euro jumped by 1.42 rubles to 59.47, eventually climbing to over 60 rubles by 11:30am Moscow time.

“It is increasingly difficult to find augments to describe the current situation, when you look at market figures every morning ” ING chief economist for Russia and the Commonwealth of Independent States (CIS) Dmitry Polevoy said.

50 rubles per dollar?

The US dollar has risen by 48% against the ruble since the start of 2014 while the euro has appreciated by 33% against the Russian currency. Investment banks no longer dare to predict the ruble exchange rate versus the dollar and the euro by the end of the year as their official forecasts are set for revision.

VTB Capital, an investment division of Russia’s second largest lender VTB, and ING Russia have announced the upcoming revision of their ruble exchange rate forecasts. Morgan Stanley’s latest forecast expected the dollar exchange rate to stand at 40 rubles at the end of the year while the current forecast by BofA Merill Lynch predicts the rate at 41 rubles. Both banks declined to comment on their forecast revision plans.

December futures on the ruble exchange rate are trading at 48.9 rubles per dollar on the Chicago Mercantile Exchange. American investors project the dollar/ruble rate at 50 rubles by August 2015.

The latest stage of the ruble exchange rate’s stabilization is not directly related to global factors, VTB Capital analyst Maxim Korovin said.

The current pressure on the ruble can only partially be explained by increased geopolitical risks, he said. “It is mainly caused by the population’s increased demand for foreign currency,” the expert said.

Attack on the ruble

Russia’s two largest retail banks Sberbank and VTB-24 admitted households’ increased demand for foreign currency over the past week. Specifically, VTB-24 said the demand had soared by 3-4 times, adding it had set aside foreign currency cash reserves in advance.

“There are no problems with supplying additional (foreign currency) cash at sales points. We don’t plan to introduce any restrictions (on foreign exchange purchases),” the bank said.

Sberbank also reported “some increase in the household demand for foreign currency cash in recent weeks.” “Sberbank is seeking to timely provide the required volume of (foreign currency) supply without the loss of the quality of services amid the enhanced demand for foreign currency cash,” the bank said.

The Russian foreign currency market is close to panicking, which already threatens the financial system’s stability, VTB-24 chief investment analyst Stanislav Kleshchyov said. “The Central Bank will have to intervene soon,” he said. This view is shared by Korovin from VTB Capital, “The scope of the ruble’s weakening clearly poses risks to financial stability.”

VTB Bank also does not rule out that the Central Bank will start foreign currency interventions to reverse the trend. “Otherwise, the ruble’s weakening will continue while there is population’s heightened demand for foreign currency,” Korovin said.

The current situation with the ruble means “panic with hints at the foreign exchange crisis of self-realizing expectations,” Polevoy from ING said.

“Measures are needed to reverse the trend and bring down devaluation expectations. In such periods, the Central Bank should intervene. The longer the regulator plays a waiting game, the more complex it will be to find a solution to stabilizing the market,” the expert said.

In Polevoy’s opinion, market participants will not start to buy the ruble again until the regulator demonstrates its ability to “repel an attack.”

RTS index falls below 1,000 points

Russia’s dollar-denominated RTS index has fallen below 1,000 points for the first time since 2009 amid the ruble’s slump. Russia’s ruble-denominated MICEX index, on the contrary, climbed to its high since the start of the year, rising to above 1,520 points.

“In the period of relative calm on the foreign exchange market, market trends both in rubles and foreign currency are equal. But the 40% (ruble) devaluation changes the rules of the game,” Kleshchyov from VTB-24 said.

Russia’s MICEX index has risen by 28.6% since March 2014 while the ruble has fallen by 32.8% against the dollar over the same period.

Foreign investors operating with dollar prices are ready to buy undervalued Russian shares in the period of the cheap ruble. “It is the ruble exchange rate that is pushing the ruble-denominated MICEX index up because a weak ruble is advantageous for Russian export-focused companies,” IT Invest expert Vasily Oleinik said.

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