Short-Term Rouble Appreciation Not Over Yet
We see room for further short-term appreciation of the Russian rouble over the next few months. The technical picture looks supportive of our view, with the rouble breaking through a three-month technical resistance at the time of writing. From a fundamental perspective, we reiterate our expectation for continuing de-escalation of tensions between Russia and the West, with investors likely to continue to price out the probability of military confrontation and/or substantive sanctions between Russia and the West over Crimea and Ukraine.
Further rouble strength over the next few weeks will allow the Central Bank of Russia (CBR) to begin to partially reverse its temporary rate hike from March 3, when it raised the main policy repo rate from 5.5% to 7.0% in a bid to stem precipitous decline in the unit. In addition, rouble stabilisation will reduce inflationary pressures from elevated import prices, providing further incentive for the CBR to ease monetary conditions. As such, we expect to see a rate cut of between 25 to 50 basis points (bps) starting in Q214, as the flagging economy would tip the balance in favour of monetary easing.
Nevertheless, we do no expect the monetary authorities to cut rates more aggressively. While we maintain that investors will continue to price out an escalation in tensions between Russia and the West, we reiterate our long-term downbeat outlook for the rouble. Our strategic view is underpinned by the country's worsening macroeconomic fundamentals, such as persistent private capital outflows, diminishing trade and current account surplus and the transition to a free-float monetary policy regime, which will weigh on the unit for the foreseeable future (see 'Even More Bearish On The Rouble, January 1). As a result, we maintain our bullish Turkish lira/ bearish rouble view in our asset class strategy table, despite being down by 2.1%.
|Tactical Appreciation In A Long-Term Depreciatory Trend|
|Russia - RUB/US$ Exchange Rate|