Lure of Ruble Carry Eclipses Surprise Rates Cut, Oil Decline
Lure of Ruble Carry Eclipses Oil Drop, Risk of Lower Rates
(Bloomberg) -- In the global hunt for yield, investors are overlooking the key factors that can make or break the ruble.
Crude oil, Russia’s key export, has dropped more than 10 percent and sent the currencies of most commodity producers tumbling, but the ruble is headed for its fourth month of gains. The currency strengthened on Friday even after a surprise decision by Russian policy makers to lower the benchmark rate by a quarter point as the appeal of borrowing in dollars and investing in higher-yielding ruble assets endured.
“This is Russia’s paradox, which is still logical: lower rates, better economy,
buy the ruble,” Vladimir Miklashevsky, a Helsinki-based senior economist at Danske Bank Plc. “The carry is good enough even with the upcoming gradual easing.”
With Russia’s benchmark borrowing rate at 9.75 percent after Friday’s cut, crude has been eclipsed for now by one of the best carry-trade returns in the world. David Oliver, who helps oversee $36 billion at Stone Harbor Investment Partners in New York, says oil would need to fall by the same amount again before he starts to fret about the currency of the world’s biggest energy exporter.
“The lack of correlation with oil has been a function of investors looking for higher yielding opportunities,” said Oliver. “Oil prices would have to move closer to $40 a barrel for those correlations to re-assert themselves in a big way.”
Russian assets have been swept up by a surge in demand for emerging-market stocks and bonds since the Federal Reserve laid out a relatively dovish outlook for interest-rate increases in its meeting last week. Analysts at Credit Suisse Group AG including Nimrod Mevorach estimate that foreigners have bought about $1 billion of ruble bonds so far this month.
Still, Mevorach recommends selling the ruble because the decoupling from oil “does not seem sustainable.” Historically, the ruble and oil prices have converged quickly after periods of divergence, and downside risks to oil prices have increased, he said in an emailed research note this week.
The ruble advanced 0.5 percent to 57.2075 at 1:46 p.m. in Moscow after the Bank of Russia’s decision, its second day of gains. The yield on government 10-year bonds was down two basis points at 7.98 percent, near the lowest level in half a year.
“The street is still bullish on the ruble, hence the resilience in the face of falling oil,” said Dmitri Petrov, a trader at Nomura International Plc in London. “Even if the central bank cuts the key rate, the carry trade will remain attractive.”
--With assistance from Ksenia Galouchko
To contact the reporters on this story: Natasha Doff in London at ndoff@bloomberg.net, Cecile Gutscher in London at cgutscher@bloomberg.net.
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Alex Nicholson, Cecile Gutscher
