Ruble Seen Weakening Further in Challenge to Retail, Bonds
Ruble Seen Weakening Further in Challenge to Retail, Bond Market
(Bloomberg) -- Russia’s ruble is set to weaken further according to options traders -- likely triggering faster inflation, reduced consumer spending and perhaps even a reversal in downward-trending interest rates.
The premium to own one-month puts on the ruble relative to calls jumped for a second session on Tuesday as the toughest U.S. sanctions yet threw cold water on the outlook for most Russian companies, save for those operating in sectors seen benefiting from a weaker currency, such as agriculture.
“A weaker ruble could conceivably trigger inflation in domestic agriculture prices -- such as sugar, grain and pork, ultimately boosting agriculture producers’ margins,” BCS Global Markets analysts including Vyacheslav Smolyaninov wrote Monday in a note. “Ros Agro is the most obvious name to be in during the current sell-off. The stock was punished for no reason.”
Yet for companies operating outside those sectors, the outlook may be more dire. Currency depreciation affects bond yields, which could raise funding costs, and a prolonged rise in prices might even tempt the Bank of Russia into suspending its rate cuts.
Despite the ominous scenarios, an economic cataclysm is anything but certain, according to the BCS analysts. “We do not think that the risk of a full-blown recession is on the cards before a dire scenario of the ruble hitting 70 to the dollar or above, and inflation breaking 5 percent,” BCS analysts wrote. The ruble has weakened 6.7 percent this week, and is at 62.6 to the dollar from 58.2 Friday.
Five-year swaps protecting against a Russian default have soared to their highest since August.
Daire Ferguson, chief executive officer of Irish online currency platform AvaTrade Ltd, said there’s more downside in store as Russia’s economy continues to heave under earlier U.S. sanctions.
“More trouble to come,” he said.
To contact the reporter on this story: Todd White in Madrid at twhite2@bloomberg.net.
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Yakob Peterseil, Natasha Doff
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