(Bloomberg) -- The ruble ended a five-day advance and Russian government bonds dropped, sending yields up the most since July, as oil retreated and Sberbank CIB said the second-best rally this year in emerging markets left the exchange rate overvalued.
The currency weakened 1 percent to 64.6400 against the dollar by 6:34 p.m. in Moscow, the most in more than two weeks and paring the gain in the past five days to 0.4 percent. Five-year government bond yields climbed from the lowest level since June 2014. Russian assets were swept up in a broader selloff in emerging markets as Brent crude retreated and a Federal Reserve official warned waiting too long to raise interest rates may overheat the economy.
Russian markets had been buoyed this week by a jump in oil, the nation’s main export earner, as well as the ongoing hunt for yield that’s been driven by record-low rates in developed markets. While the ruble’s 14 percent appreciation in 2016 has helped tame inflation by reducing the cost of imports, it’s also putting budget targets out of reach by curtailing the amount of local-currency revenue the government collects from sales of oil abroad.
“The ruble is too expensive compared to oil and the budget," said Iskander Lutsko, an analyst at Sberbank CIB, who forecasts the Russia needs the ruble to be weaker than current levels and oil to surpass $48 a barrel if it will meet its budget-deficit target. "Everyone understands that it hurts the economy."
Russia’s budget shortfall is set to widen to 3.9 percent of economic output this year, matching the gap in 2010, according to the median of 18 forecasts compiled by Bloomberg.
In July, President Vladimir Putin fueled speculation monetary authorities could intervene to weaken the currency when he instructed his prime minister to monitor its strength as it traded at about 63 per dollar.
The weakness on Friday came as comments by Fed Bank of Boston President Eric Rosengren sent the odds for a U.S. rate increase by year-end above 60 percent. He spoke a day after European Central Bank President Mario Draghi downplayed the likelihood of additional stimulus.
The Bank of Russia, by contrast, is projected to continue with easing when it meets in a week. Policy makers will cut the key rate by 50 basis points to 10 percent, according to 26 out of 29 economists surveyed by Bloomberg. Lower rates will exert pressure on the ruble, according to Nordea Bank analyst Olga Lapshina.
The nation’s stocks also declined on Friday, with the Micex Index losing 1 percent to 2,030.07. The gauge broke through 2,000 for the first time last Friday and reached all-time highs this week. Five-year bond yields rose 10 basis points to 8.32 percent, snapping the longest run of declines since July 2015.