Goldman Sees Russia Ending Easy Ruble Short-Seller Trade

By Matthew Brown and Vladimir Kuznetsov  

Photographer: Simon Dawson/Bloomberg

Ksenia Yudaeva, First Deputy Governor of the Bank of Russia, said as recently as Oct.... Read More

Currency traders who have been taking advantage of the Russian central bank’s predictable market interventions are about to find making money a lot harder, according to Goldman Sachs Group Inc.
The bank’s analysts said they expect policy makers will abandon rules-based currency interventions at a meeting today, freeing themselves up to sell enough dollars and euros when needed to support the ruble. The central bank will also raise the benchmark interest rate by half a percentage point to 8.5 percent, they said, in line with the median estimate in a Bloomberg survey.
Speculation that policy makers will act to stabilize the currency triggered the biggest daily appreciation since at least 2003 yesterday. The ruble slumped to records against the dollar on seven consecutive days before the rebound, even as the central bank spent $28 billion on
interventions this month to shore up sentiment weakened by U.S. and European sanctions over President Vladimir Putin’s role in Ukraine.
“The current regime only provokes speculations -- traders know at what levels and with what sums the central bank will be offering currency,” Anna Bogdyukevich, an economist at ZAO UniCredit Bank, said yesterday by e-mail. “If you take this out, the speculations should decline.”

Ruble Rules

The central bank’s press office declined to comment on the ruble yesterday. Bank of Russia First Deputy Governor Ksenia Yudaeva said as recently as Oct. 24 that the country plans to move to a free float of the ruble by next year. It’d be the first time Russia has removed restrictions on currency swings.
The ruble jumped as much as 5.1 percent to 43.66 per dollar yesterday, the most since Moscow Exchange began tracking the data 11 years ago, before paring gains to 41.6445 by the close. The currency weakened 1.4 percent by 12:02 p.m. in Moscow today, bringing the drop to 22 percent this year, the most among major global currencies after Argentina’s peso.
The Bank of Russia’s intervention guidelines say that when the ruble weakens past the end of its trading corridor, the bank spends $350 million to defend the band it before shifting it by 5 kopeks. The process is repeated each time the currency falls by 5 kopeks, allowing traders to profit from keeping short ruble positions and betting on further depreciation. It moved the band by 40 kopeks on Oct. 29 and by 35 kopeks on Oct. 30.
The interventions have driven Russia’s foreign reserves down 14 percent in 2014 to a four-year low of $439 billion.

‘Less Costly’

“We expect the bank to abolish its current intervention rule and conduct a discretionary currency intervention of a magnitude sufficient to stabilize the FX market,” Goldman Sachs analysts Clemens Grafe and Andrew Matheny wrote. “Such a policy choice would likely be more effective and significantly less costly than a large policy rate hike.”
The central bank has increased the benchmark rate 2.5 percentage points since February in a bid to stem the outflows. All but five of the 31 economists surveyed by Bloomberg expect the bank to raise rates again today, with two predicting a 1 percentage-point increase.
Not all economists are expecting Russia to alter ruble policy.
“We don’t think they will change the intervention mechanism, although it’s a risk,” Anders Svendsen, an analyst at Nordea Bank AB in Copenhagen, said by e-mail yesterday. “They will wait a bit more. Of course they’re not happy spending as much of the dollar reserves as they are at the moment, but they could also ease that a bit with higher rates.”

‘Decisive Changes’

The premium that banks are willing to pay to gain funding in dollars instead of rubles through basis swaps has shrunk from a record reached Oct. 10, signaling the foreign-currency shortage in the real economy is abating.
The rebound yesterday came after the ruble had dropped to the most oversold level in nine months, according to its relative strength index. RSI for the dollar against the Russian currency fell to 60 yesterday from 85 a day earlier, the first time in a month it was below the 70 level that signals a turnaround.
This month’s “sharp” ruble drop along with declining reserves “are likely to be of significant concern to the central bank,” Goldman’s Grafe and Matheny wrote. “Given related risks to financial stability, as well as to inflation expectations, and we think this is likely to cause the central bank to enact decisive changes to its FX policy.”