Abnormal reaction: why the ruble rises after fed decision

Abnormal reaction: why the ruble rises after fed decision


Wednesday, March 15, the Federal open market Committee, the fed raised the benchmark interest rate by 0.25 percentage points, to the level of 0,75–1%. This is the third rate increase since December 2015, when the fed for the first time in nine years, picked it up from the record low level of 0-0,25%. Yesterday’s decision of the us regulator driven by strong macroeconomic statistics in the USA. As noted in the fed statement that inflation in the country is gradually moving towards the target of 2%, and risks for the US economy remain “balanced”. In this regard, the fed expects a further two increases of the basic interest rate in 2017.

The reaction of world markets to tighten monetary policy in the US has been inconsistent. Us stock indices showed a slight increase: the index of wide market S&P 500 increased 0.8% to 2385,3 points, the Dow Jones fell 0.5%, to 20950,1 points, while the indicator of high-tech companies NASDAQ — on 0,7%, to 5900,1 points.

However, the US dollar index course the currencies of the six countries with which the United States maximum trade, after the U.S. lost 1.1%, and on Thursday morning fell to its lowest level in five weeks: 100,25 points. Weakening dollar and the Russian ruble: 14:40 Moscow time the dollar at auction Moscow stock exchange was $58,04 is 0.6% below the previous close. May futures on Brent crude oil by this time has risen in price for 0,93%, to $52.3 per barrel.

Experts interviewed agree that the positive dynamics of commodity assets and the ruble is a temporary phenomenon, so the private investors should not succumb to the euphoria.

Alexander Losev, General Director of “Sputnik — capital Management”

The dollar by the beginning of summer: 59,50–60 RUB.

Where to invest: the releases of the Russian bonds with a maturity of up to three years.

“Despite the increase in the fed rate by 0.25 percentage points, the market reaction was more than positive. The soft tone of the statements of Janet Yellen, the fed’s confidence in the prospects of the US economy and a mention in the press release that stimulative policy will continue for “some time”, caused euphoria among investors. The Russian market was no exception, responding to news out of Washington by strengthening of the ruble, rising stocks and a small decline in bond yields.

Now investors will wait for the response of the Bank of Russia, which is a positive reaction of the markets provides an additional argument in favor of lowering the key rate at its meeting on 24 March. Returning risk appetite from global players and expectations of a rate cut, the Central Bank can lead to a further decline in yields of ruble-denominated bonds (including OFZs) and interest rates.

However, if you look at the facts, the picture becomes less rosy. Ruble assets of interest to investors only with a substantial difference between interest rates in roubles and dollars. Further rate cuts of the Central Bank at higher rates in the U.S. will reduce the attractiveness of the ruble to play carry trade. Let’s not forget that the target level of the fed rate for the first half of 2019 is 3%. This means that the risk of four increases in the fed rate in a year will not go away. Also persist the imbalances in global interest rates and holding the stimulus of various Central banks.

If the market will see in the minutes of the meeting of the Federal open market Committee of the fed, more explicit guidance on interest rates and if the reserve banks will continue to argue for tighter monetary policy, the euphoria can quickly fade. In this case, the ruble and Russian securities will again be under pressure. In may, the ruble may return to values of 59.5–60 rubles per dollar”.

Andrew Vallejo-Roman, head of asset management National management company

The dollar by the beginning of summer: 60-62 RUB.

Where to invest: not a strategy.

“So far, we can see the unpredictability of the effect of raising rates on the ruble. Everything moves according to plan. The idea is that when the base rate WP si increases, the dollar should strengthen against foreign currencies. Now exactly the opposite is happening — the dollar is weakening locally. Investors have growing interest in emerging markets and bonds. In my opinion, this is a temporary phenomenon. So far, the market expects two more rate hikes in 2017.

However, it is important to note that the Bank of Russia will reduce the key rate. This means that the difference between ruble and dollar rates will decrease and the profitability in the framework of the carry trade is falling. Now the yield of this strategy in the Russian market is quite high, but as the fed’s rate hike it will decrease as the interest in ruble assets.

Based on current budget realities of Russia, by mid-summer, the Ministry of Finance needs dollar exchange rate in the district was 65 RUB. This value, however, we are unlikely to see. But the 60-62 range looks more realistic.”

Vladimir Bragin, Director for analysis of financial markets and macroeconomics UK “Alfa-Capital”

The dollar by the beginning of summer: 60-65 RUB.

Where to invest: long OFZ.

“Yesterday’s increase in US interest rates showed the market that the fed is not going to change the rules of the game. Investors clearly understand how the fed assesses the situation and how he will react to changes in the macroeconomic statistics in U.S. data on inflation, unemployment, retail sales etc. that’s why the market reaction to the tightening monetary policy was moderate.

Given that U.S. interest rates still remain low compared to developing countries, in the long term dollar yields will continue to decline. In this light, a good investment strategy are Russian bonds, especially long OFZ. You can also pay attention to the quality of Eurobonds of developing countries.

As for the impact of monetary policy on the exchange rate, it will also be quite weak. Speculative carry trade strategy has not disappeared — foreign investors are still actively using it, supporting the Russian currency. Also support the ruble oil prices, which grow on the background of reduction of stocks in USA.

But what really is a danger to the ruble, is increasing the production of oil in countries that have not acceded to the agreement of OPEC to reduce oil production. In the same USA will gradually go reactivate oil wells. This will contribute to the growth of excess supply in the market and the decline in oil prices. Do not forget about the currency intervention of the Ministry of Finance, who is not interested in the strengthening of the ruble. In this regard, the ruble may sink to the level of 60-65 rubles per dollar”.

Alexey Belkin, the portfolio Manager FG “Finam”

The dollar by the beginning of summer: 59,5–60 RUB.

Where to invest: dividend stocks.

“Before the fed’s meeting, many expect that the dollar will rise and commodity assets such as oil and gold to fall in price. The first reaction of the market was just that, but then the situation changed to diametrically opposite. The dollar began to decline, and commodity markets — to grow. If the situation persists, then the best assets for investment will be the shares of Russian issuers that regularly pay a dividend. We are talking primarily about the securities of the electricity sector, metallurgists, partly due to the financial sector. Also do not lose their relevance OFZ.

The dynamics of the ruble exchange rate in the future will be determined not by the fed’s decision, and the movement of oil prices and the meeting of the Bank of Russia, scheduled for March 24. The probability that the Central Bank will cut key rate in March and this will lead to the weakening of the Russian currency. The resistance level the pair dollar/ruble is approximately 59,5–60 RUB. In this range, the ruble can hold out long enough, but if he reaches the mark of 60 rubles per dollar, can form a medium term trend of the weakening of the Russian currency”.

Dmitry Aleksandrov, investment Director IK “University the Capital”

The dollar by the beginning of summer: 61.5 rubles

Where to invest: long OFZ and other ruble-denominated bonds.

“In principle, the fed did not change any guidance. In addition, all expected a more harsh statements. The weakening of the dollar seems temporary to me — such a signal can be recognized in the behavior of Eurobonds. I think in the near future, the ruble may yet grow by 30-40 kopecks. mainly due to the depreciation of the dollar. Gradually the confidence of investors that the fed will pursue a tougher policy, again become strong. So no one will be a long time to consider the dollar as a weakening currency. At the end of April is possible to put a dollar in the area of 61.5 rubles

By and large, the economic climate in Russia is not particularly changing. There is still need to consider the dynamics of the key rate of the Central Bank — in the current circumstances, the regulator is easier to go to its decline. The rate may fall to 0.25–0.5 p. p. Speculators who earn on the carry trade deals with the ruble will continue to follow this strategy because the ruble rates are still attractive. Everyone understands that everything goes according to plan, so long paper to grow.”

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