Tuesday, January 28, 2014

Russia bucks the trend - talks the ruble lower

Central banks of several nations who are experiencing sharp currency declines are taking action to stabilize the situation.
NY Times: - The Reserve Bank of India unexpectedly raised its benchmark interest rate on Tuesday by 0.25 percentage point, but it said that if consumer price inflation eased as projected, it did not foresee further raises.
Reuters: - Turkey's central bank governor raised expectations for an emergency interest rate hike on Tuesday, denying he was hostage to political pressures and vowing decisive action to fight rising inflation and a tumbling lira.
Bloomberg: - Brazil’s real strengthened from a five-month low as the central bank planned to support the currency by rolling over the remaining foreign-exchange swaps that mature next month.
But not the Russians. The nation's central bank likes the weak ruble because the currency decline boosts the domestic proceeds from Russia's energy exports. This is particularly important to them as energy prices remain subdued (Brent is down 3% this month).
RIA Novosti: - Elvira Nabiullina [governor of the Bank of Russia] said in a television interview on Channel One that there were no intrinsic problems with the ruble, which has slid to historic lows against the euro and the dollar in recent weeks.

It’s not that we have a weak ruble, but that the dollar and the euro have strengthened in relation to emerging market currencies,” Nabiullina told interviewer Vladimir Pozner.
As a result, while other EM currencies have stabilized, the ruble continued its slide. In fact it is now at record lows against the euro (Russia exports a great deal of energy products to the EU).
Chart shows the euro appreciating against the ruble (source: Google)

While helpful in the nearterm, this strategy could prove dangerous in the long run. Russia's inflation rate is running at about 6.5% and could easily spike as it did in the late 90s when the ruble was devalued.

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