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RUB: some additional thoughts about the mechanism


On Wednesday, RUB opened at 37.60 vs. BASKET following expected cocnerns about the altered CBR intervention mechanism. However, RUBBASK closed at 37.45 and USDRUB at 32.35. We consider this reaction as expected because the move in RUB was done in a rather illiquid market in the evening on Tuesday. Meanwhile, we would like to share some other ideas about the new mechanism and RUB dynamics.

Firstly, the change in mechanism does matter for RUB trading below 37.35, because USD 70mn interventions (or USD 2bn on a monthly basis) not moving the market no longer exists. Thus, assuming that the RUB market is balanced at some volume of interventions below USD 4bn, then RUB is likely to be trading in a narrow range around the lower bound of the USD 200mn intervention zone. So, the CBR has indeed trimmed RUB upside to some extent.

Secondly, the introduced degree of band flexibility is not much higher. At different CBR intervention volumes, the dual-currency band will be shifting faster but only by 10 kopeks per month (Figure 1). Moreover, had this new mechanism been in place throughout 2013 and YTD FX interventions been unchanged, the mid-point of the dual-currency band would be around 36.10 (vs. 35.80 at the moment), i.e. only 30 kopeks higher. Considering that RUB has been trading in a range of 31.50–33.50 over the last two months, the new degree of flexibility does not look to be a game changer that would suggest further short-term RUB depreciation (compared with opening levels).

As such, we see only two reasons why investors might expect further RUB weakness: i) the CBR proved to be too decisive towards freefloat RUB and is moving much faster than the market anticipated; and ii) shaky appetite for EMFX because it is a major driver of RUB dynamics. However, RUB looks fair or even slightly undervalued to EMFX (up to 1%) and other factors, so, we do not expect pressure unless EMFX continues to decline further.

Maxim Korovin, Anton Nikitin
VTB Capital analyst

ruble, CBR

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