|Ruble ‘Undoubtedly’ to Breach Target, Drops to Record Vs Euro|
|January 27, 2009|
By Emma O’Brien
Russia’s ruble weakened to a record low against the euro and slid against the dollar as investors speculated the currency will breach the central bank’s target and may tumble at least 8 percent versus the dollar.
The ruble, which Bank Rossii manages against a basket of dollars and euros to protect exporters, depreciated for a third day to as low as 43.9772 per euro, the weakest since the common currency was introduced in 1999. The ruble will “undoubtedly” breach the central bank’s new target of 41 to the basket and 36 per dollar in the next few months, according to Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank.
Prime Minister Vladimir Putin defended the central bank’s “gradual devaluation” of the currency in a Bloomberg Television interview Jan. 25, saying it gave Russians time to convert their rubles into other assets. Russia’s currency has lost 29 percent against the dollar since August, as a 63 percent drop in Urals crude oil prices and the worst economic crisis since Russia’s $40 billion debt default in 1998 spurred investors to withdraw funds from the country.
“There are people who expect the ruble to weaken very fast to the end of this corridor,” said Nikolai Kashcheev, head of economic research at MDM Bank in Moscow. “There are a large amount of players, partly foreigners, who think the ruble will weaken.”
The currency was 0.8 percent weaker at 43.5780 per euro by 5 p.m. in Moscow, and slumped 0.7 percent to 33.0069 per dollar, after strengthening 0.2 percent yesterday.
Russia reduced its reserves by more than $200 billion, or 34 percent, since August as Putin sought to avoid “sharp” devaluations of the currency. During the 1998 crisis, the ruble declined as much as 29 percent in a day and lost 71 percent against the dollar that year, erasing people’s saving and triggering runs on bank deposits.
“We did not act as some countries, we did not crush the national currency overnight,” the prime minister said from the northern Russian city of Velikiy Novgorod. “We have consciously decided to spend gold and currency reserves, to give the possibility to participants in the economy, including citizens, to realize what is happening and make decisions.”
Bank Rossii ended this year’s almost daily devaluations of the ruble on Jan. 22, expanding the currency’s trading range by the most since it started depreciations on Nov. 11, and said it would use the nation’s $396.2 billion in foreign-currency reserves to defend it.
The ruble’s new band, which spans from 26 to 41 versus the basket, may be expanded again should Urals oil, Russia’s chief export blend, fall to $30 a barrel and “stay there for a long time,” Bank Rossii Chairman Sergey Ignatiev told reporters Jan. 22. Urals fell for a second day, dropping 1.4 percent to $44.52 a barrel, below the $70 average needed to balance the budget this year, according to the Finance Ministry.
The economy will probably contract 0.2 percent this year, according to Economy Ministry forecasts as a global recession reduces demand for energy, which makes up more than 70 percent of Russia’s exports.
Putin said he sees “light at the end of the tunnel” for the economy by the middle of the year. “We are optimists,” and “we act on the premise that the global economy will rise to its feet gradually and so will the Russian economy,” he said in the interview.
Russia’s unemployment rate rose to 7.7 percent in December, the highest in three years, while retail sales grew at an annualized 4.8 percent last month, the slowest pace in nine years, the Federal Statistics Service said today.
Pace of Decline
Against the basket of about 55 percent dollars and the rest euros, the ruble dropped 0.7 percent to 37.7647, its lowest close against the mechanism since Jan. 19. The currency has weakened against the basket every day since the central bank last widened the trading band.
The ruble will test the 41 level and there is a “possibility” it could reach as low as 50 against the basket, Elina Ribakova, Citigroup Inc.’s chief economist in Moscow, said yesterday. Continuing oil declines will probably ensure the ruble breaks the new basket band, State Street Corp. and Barclays Plc said last week.
The pace of the ruble’s drop to 41 versus the basket depends on movement in crude prices, said Peter Rosenstreich, chief market analyst at Geneva-based currency-trading firm ACM Advanced Currency Markets.
“We still think the ruble will continue to come under pressure and that it will test the end of that new trading band,” he said. “The vast majority of traders out there think the ruble needs to continue to depreciate.”
Investors are betting the ruble will come close to the new threshold of 36 per dollar within three months. Non-deliverable forwards show the currency sliding 7.7 percent to 35.76 in three months time, while 12-month NDFs show a 17 percent decline to 39.64 per dollar within a year.
The contracts gauge expectations of a currency’s movement as they protect companies against foreign-exchange fluctuations by fixing a rate at a particular level.
The ruble may weaken another 7 percent against the dollar this year, based on yesterday’s closing price, JPMorgan Chase & Co. analysts said in a research note today. The currency may trade at an average 35.3 per dollar this year, weaker than the New York-based bank’s previous forecast of 31.4. Next year, it may average 34.8 per dollar and 35 per dollar in 2011, JPMorgan analysts Elena Bazhenova and Jean-Charles Lemardeley wrote.
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