The operation of the Ministry of Finance/Central Bank by buying foreign currency, initially perceived as a way to weaken the appreciating ruble could provoke the opposite effect: the ruble is becoming less volatile and therefore more attractive to investors, earning on the strategy of carry trade (carry trade, earnings on the difference in interest rates. — ) noticed Sberbank CIB analysts Tom Levinson, Iskander Lutsk and Vladimir Zubanov. “If purchases of currency by the Central Bank will reduce the volatility of the ruble (that is, to accomplish one of the goals stated by the Ministry of Finance), this will lead to increased yields, adjusted for volatility (volatility adjusted return), that is, will increase the attractiveness of the ruble as currency for carry trade transactions,” they wrote in the review for February 14.
Some investors focused on yield, currency adjusted for volatility. Therefore, if price movements become more fluid and predictable, the interest of such investors is increasing. Three-month implied volatility (implied volatility) of the ruble on 14 February dropped to the lowest level since the beginning of October 2016, follows from the data Bloomberg terminal. The strategy of carry trade in the ruble (to borrow dollars at low interest rates to buy them rubles and place in Russia at high interest rates) beginning in 2017 would 7.84% of second yield in the world after the Egyptian pound.
The ruble is getting stronger
The hard ruble goes up in spite of the intervention of the Ministry of Finance, and “the reason for this strengthening is unclear,” said Sberbank CIB. High demand is supported by regular sales of currencies of large exporters. As of 17:30 GMT on Tuesday the rouble appreciated by 1.07%, follows from the data Bloomberg terminal: one dollar, at the exchange gave 57,4 RUB (at the end of January the rate was higher than 60 rubles.). For the week, while the Ministry of Finance buys foreign currency, the rouble has risen in price for 2,63%.
The Ministry of Finance explained the need for currency transactions (currency is bought on the oil and gas windfall oil at more than $40, is accumulated on the single account of the Federal Treasury, and then will be transferred to the Reserve Fund), including a desire to protect the real effective exchange rate from excessive volatility, first Deputy Prime Minister Igor Shuvalov said earlier that the volatile ruble is bad for exporters. While Reuters cited calculations of the Ministry of Finance (Department they were not confirmed), which showed that at an oil price of around $55 (as of now) the dollar resulting from the operations of the Ministry of Finance should cost on average 64,9 RUB 7.5 RUB more than the current value.
Head of the dealing center, head of foreign exchange and money market Metallinvestbank Sergey Romanchuk agree with the observation of Sberbank CIB: within three months, the rouble is becoming more attractive for the carry trade, including in connection with intervention of Finance Ministry, he said. Another factor is the higher rates of ruble as a result of the intervention, since the Central Bank wants to neutralize their effect on monetary policy. However, says Romanchuk, during the year the operations of the Ministry of Finance still will directly affect the ruble weakened his cumulative 5-10%, so on the horizon of one year, the ruble is unlikely to become more attractive for carry-trade.
In recent days foreign exchange market had come “hot money”, helped by the preservation of the key rate of the Central Bank and review of the regulator’s intention to keep the rate at this level for a longer time and also begun on February 7 intervention of the Ministry of Finance, confirms Executive Director of the Department of monetary market of Bank “Opening” Sergey Smirnov. Foreign investors with a big appetite are looking at the ruble against other currencies. “If there was devaluation, the appetite would be decreased, and a slight strengthening or stability of the exchange rate increases the attractiveness of the carry trade,” he says.
Only works in one direction
Other experts disagree with the thesis of Sberbank CIB. “The purchase of currency reduces the volatility only when the strengthening of the ruble, says chief economist “PF Capital” Evgenie Nadorshin. But because, I believe, the purpose of intervention was not the strengthening, and weakening of the national currency, and in the longer term, the ruble will be weakened (at least in the future years), no further currency purchases will only accelerate the weakening of the ruble, thereby increasing its volatility”. Carry-traders are not interested in this, he says. The current strengthening of the ruble Nadorshin connects with a short-term external factors that are not related to carry trade.
The ruble will significantly strengthen with expectations of further growth in oil prices and purchases of the Ministry of Finance will constrain excessive strengthening, reducing exchange rate volatility, says a senior economist at Danske Bank Vladimir miklashevskii. However, declining oil prices, the ruble will fall faster than in the absence of a mechanism of the Ministry of Finance, and volatility will be higher than usual, confirms miklashevskii. So he doesn’t see enhance the effect of the strengthening of the ruble in the transactions of the Ministry of Finance, on which said Sberbank CIB.