RUB: some relative-value thoughts. RUBBASK traded sideways in a range of 38.15–38.30, closing near the lower boundary of this range as the global markets got some relief and the EM FX currency crisis did not develop further. USDRUB hit an intra-day high at 33.25 but closed near 33.17. Many investors have been devoting a lot of attention to RUB recent, wondering what happens to RUB if oil stays at USD 115/bbl and why RUB is not blowing up along with other EM FX. We would like to highlight some of our thoughts.
First, oil surging to USD 115/bbl looks to be a non-event for RUB at the moment because the clear reason for RUB being under pressure is the sell-off in EM FX. According to our RUB-oil-EMFX model, RUB is indeed undervalued by 2–3% relative to the predicted value. This can probably be explained by dividend flows and tourist-related demand for FX (the market is waiting for the last portion of dividends, of up to USD 1.5bn, to be executed this week). Nevertheless, one more factor is that a positive oil-EMFX correlation during the phase of EM correction has rather long history and this correlation has obviously broken this time. Moreover, in terms of FX-related flows, the high oil price translates into an increase in duties and taxes with a 1–1.5 month lag. Hence, high oil prices now will only generate exporter-related flows to RUB at the end of September (or even in October). Indeed, if oil prices stay elevated for a reasonably prolonged period of time, this would fuel RUB’s appreciation against EM FX peers, but apparently the market is not pricing this scenario in at the moment and swings in EM FX (recording new lows every week) remain the key driver for RUB.
Second, why is RUB not blowing up with other peers? First, it is worth highlighting that RUB is indeed doing as badly as other EM currencies. Of course, based on spot returns, RUB has lost only 11% from the peak in 2013, while ZAR, TRY and BRL have lost more than 15%. However, RUB is much weaker than the currencies with positive current account metrics. For example, CEE currencies are only 3–5% down from the peak. Based on spot returns adjusted for FX volatility, RUB is three standard deviations away from its average exchange rate, i.e. as much as ZAR, TRY and BRL. We relate this fact with the idea of lower RUB volatility relative to EMFX due to implied CBR activity and high carry in USDRUB NDFs, making ‘short RUB’ plays rather costly. So, it looks like RUB is already rather weak relative to its historical performance and historical volatility.
We do not see any reasons for RUB to follow the same disorderly depreciation path as INR, IDR, TRY and ZAR have done in recent days. Relative to EMFX in the last few weeks, RUB is indeed outperforming by 3.5%. However, with the CBR offering USD 7-8bn in the FX market per month, we think that RUB could outperform EM FX further and might only catch up with EM peers over time if the CBR continues shifting the band at the same pace, i.e. by 5 kopeks every 2–3 trading days.