RUB: Stay strong, stay long – HSBC

Analysts at HSBC point out that after solid gains in 2016, the RUB has continued to perform well in 2017 and remain of the view that the currency will appreciate further in 2018, with the positive macromix – characterised by economic growth at potential and inflation below the central bank’s target of 4% – to continue to drive RUB appreciation.

Key Quotes

“A prudent central bank ensuring comfortably high real rates is also likely to be part of the RUB-supportive equation. Moreover, we do not see any disruptive changes on the balance of payments side, particularly with oil prices in the mid-USD50s/bbl and a medium-term low-volatility, external backdrop for EM in general. Therefore, we maintain our USDRUB forecast of 52.0 by end-2018.”

“However, we think that it is worth discussing some of the risks that are most commonly used to counter our RUB-positive view. We also state why we believe these risks are not a particular concern to us for now. 

1) More aggressive rate cuts: We do not see a good reason why the RUB would weaken on a faster pace of cuts if they are the result of inflation undershooting the target by a significant margin. More importantly, we do not believe the CBR will cut rates too far. The central bank’s policy is a function of a predefined real interest rate objective, assuming an inflation rate of 4% in the medium term.

2) FX reserves building: The CBR wants to rebuild FX reserves with an official objective of USD500bn. Given their recent communication, FX interventions are unlikely to commence before end-2018 at the earliest, and probably not before 2019. The potential expansion of Ministry of Finance FX purchases could be more topical in 2018. However, the scale of purchases remains uncertain and we believe these purchases – which would partly offset higher oil earnings – are unlikely to reverse RUB appreciation.     

3) RUB is moving into overvalued territory: The RUB REER has risen this year, but this appears justified by the improved economic backdrop and rising oil prices. Our metrics do not suggest a valuation misalignment.

4) Heavy positioning risks a reversal: Admittedly, foreign positioning in the local bond market is at all-time high. However, we do not see a significant risk of a sudden disengagement as inflation stays low. Russia is less exposed on a relative basis than many of EM currencies to a position reversal.”