Yesterday, RUB weakened 3.8% against USD to settle at 56.4. Trading activity was very high: MICEX reported USD 5.8bn in USDRUB turnover. Meanwhile, Brent remained on a softer footing: crude closed 2.6% in the red at USD 61.0/bbl. The commodity market’s sluggish performance was an important background for the action in RUB, but local factors also came into play.
CBR Governor Nabiullina announced that the target level of international reserves was “2-3 years of significant capital outflow.” This corresponds to the CBR’s estimates of USD 500bn. As the current level of international reserves is USD 360bn, the replenishment cycle would extend well into 2018 if conducted at the current pace – a point later reinforced by First Deputy Governor Tulin, who also said that the reserve purchases might be paused, apparently if the market impact is excessive. Given current oil weakness, negative seasonality for the Russian FX market and favourable technicals, this implies a softer behaviour for RUB for some period of time.
Meanwhile, headlines from Ukraine have also kept investors concerned, but today we think global factors are to take centre stage. The macro agenda features a triple whammy of the US nonfarm payroll report, the Greek payment of EUR 300mn to the IMF and the OPEC meeting in Vienna.
Against this background, ECB President Mario Draghi’s warning about an increase in bond market volatility has struck with a vengeance, with US and German 10-year bond yields at their high for the year. The S&P500 index is testing its 50-day moving average and slippage through this level opens up the risk of a much stiffer correction.
The market is discounting an increase in US nonfarm payroll employment of 225k and other labour market indicators are approximately consistent with such an out-turn. If this is the case, then the market will continue to favour September as the lift-off date for the first hike in the fed funds rate, despite the IMF’s advice to the Fed yesterday to delay the rate hike until the first half of 2016.
As far as Greece is concerned, the newsflow remains confusing, with shifting ‘deadlines’ and a lack of consensus between the Greek government and its official creditors on what needs to be done to unlock the EUR 7.2bn loan. The worst case scenario is a debt default, which then leads to Greek capital controls and meltdown in the Greek banking system.