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from Global Investing:
Is the rouble overhyped?
For many months now the Russian rouble has been everyone's favourite currency. Thanks to all the interest it rose 4 percent against the dollar during the July-September quarter. How long can the love affair last?
It is easy to see why the rouble is in favour. The central bank last month raised interest rates to tame inflation and might do so again on Friday. The implied yield on 12-month rouble/dollar forwards is at 6 percent -- among the highest in emerging markets. It has also been boosted by cash flowing into Russian local bond market, which is due to be liberalised in coming months. Above all, there is the oil price which usually gets a strong boost from Fed QE. So despite worries about world growth, Brent crude prices are above $110 a barrel. Analysts at Barclays are among those who like the rouble, predicting it to hit 30.5 per dollar by end-2012, up from current levels of 31.12.
All that sounds pretty bullish. But there are reasons why the rouble's days of strength may be numbered. First the QE effect is unlikely to last. As we argued here, QE's impact will be less strong than after the previous two rounds. Analysts at ING Bank point out that in 3-6 months after the launch of QE2 oil prices gained 40 percent, pushing the rouble up nearly 10%. This time oil won't repeat the trend this time, and neither will the rouble, they say:
A chance for higher policy rates may support the rouble in the short-term, but we doubt it will steadily gain from these speculative carry-trade
from Global Investing:
Oil falls. So does the Russian stock market
Russian equities have had their worst week since early-December, with losses of over 6 percent. But don't look too far for the reason -- world crude futures have fallen to three-month lows around $114 a barrel on worries that U.S. and world economic growth may not be picking up after all. They too have fallen 6 percent so far this week. Check out the following graphics showing how Russian stocks and its currency move in lock-step with oil prices:
If anything, the falls on Russian assets are outpacing the weakness on global crude oil markets in recent months, possibly because the jitters that caused last December's massive falls have not been entirely overcome. Anti-government demonstrators are no longer hitting the streets but with President-elect Vladimir Putin to be sworn in next week, fears are the Kremlin may prefer squeezing more cash from energy companies to implementing the reforms the economy desperately needs. Latest plans flagged on Thursday to raise oil and gas extraction taxes would seem to confirm these worries and are hitting energy sector shares -- half the Moscow index.
from Financial Regulatory Forum:
ANALYSIS-Soft capital controls won’t stop rouble rally
By Andrey Ostroukh
MOSCOW, May 14 (Reuters) - Russia, worried that the rallying rouble will hurt the economy, is moving to discourage inflows of hot cash and cap foreign borrowing, but without full scale capital controls they will at best slow down the appreciation.
Adjusted for inflation, the Russian rouble is already back to pre-crisis levels while gross domestic product (GDP) is not expected to recover to such a point until at least 2012.
