Even More Bearish On The Rouble

With the recent break through a multi-year technical support around the RUB33.50/US$ level signalling growing bearish sentiment, the technical picture for the rouble looks weak. We have long maintained a bearish view on the rouble on account of Russia's deteriorating current account outlook, growing net capital outflows, the Central Bank of Russia (CBR)'s gradual transitioning towards a free float policy regime by 2015. However, along with our expectation for a rate cut by the CBR in H114, the weak technical picture and recent rapid deterioration in the country's macroeconomic fundamentals suggest that rouble depreciation in 2014 might proceed at a faster pace than we previously anticipated. As such, we have adjusted our 2014-2015 outlook for the currency, and now we expect the exchange rate to average RUB33.80/US$ in 2014 from RUB33.16/US$ previously, and RUB35.25/US$ in 2015 from RUB34.10/US$ previously.

Indeed, in Q413 Russia recorded the lowest current account surplus since 1999, at just US$4.7bn, implying that the deterioration in the country's trade balance is progressing at a faster rate than we previously anticipated. It is also noteworthy that the narrowing of the current account surplus has not been accompanied by a reduction of the net financial account outflows, which reached a full-year outflow of US$65bn in 2013. While we have long highlighted net capital outflows as a fundamental driver of rouble weakness going forward, the scale of outflows at end-2013 in the context of decreasing current account surplus indicates even more pronounced depreciatory pressures.

Adding further momentum behind these depreciatory pressures on the currency, as we have already highlighted will be the CBR's gradual transition from a managed float regime to a free float and currency targeting regime( see 'Faster Rouble Depreciation Possible', November 27). At present, the CBR maintains a corridor for the rouble against a euro and US dollar basket (45% euro, 55% dollar), aimed at smoothing the volatility of the unit. The CBR has had to shift the band downwards more than 31 consecutive times since June 28, a sign of mounting selling pressure on the unit, which in turn has triggered further bearish sentiment by investors. This negative feedback loop between the CBR's moves and investor sentiment will continue to bolster the depreciatory pressure on the unit in 2014.

Breakthrough Signalling Bearish Sentiment Growing
Russia - RUB/US$ Exchange Rate, Weekly

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Geography: Russia

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