Since the beginning of the year, the ruble lost 7.5% paired with the dollar and 6.5% paired with the euro, returning to levels in late August – early September 2019, when fears about further escalation of trade wars dominated the markets. The active weakening of the ruble has been going on since mid-January, when the spread of the new coronavirus in China fell into the spotlight of market participants. At the first stage, when the virus was mainly localized in China, the ruble was under pressure along with other currencies of the countries exporting raw materials. Fears of a slowdown in the Chinese economy, which accounts for about 50% of global metal consumption, as well as 13.5% of global oil consumption, have led to a sharp drop in commodity asset prices. In late February, when the epidemic began to spread actively outside of China, a wider class of assets, including the US and European stock markets, was under pressure. Amid the flight of investors into high-quality assets, the pressure on the ruble exacerbated.
Dynamics of major currencies of developing countries since the beginning of the year,%
The prospects for the Russian currency at present are mainly determined by the dynamics of the spread of the coronavirus and the emerging expectations regarding its consequences for the global economy. In our opinion, on the horizon of March, the risks of a further weakening of the ruble remain increased, since the spread of the epidemic outside China has not yet been able to be controlled. A further increase in the number of cases of the disease is fraught with the extension and expansion of the radius of restrictive measures, which means the emergence of deeper disruptions in the operation of production chains, as well as a fall in consumer demand under quarantine conditions and in the future, risks of falling investment demand in the event of prolonged uncertainty about the extent of the epidemic. Together, these factors can aggravate recession fears among financial market participants, which may lead to new waves of exit from risky assets and flight to quality. On the horizon of March, we see significant risks of the ruble weakening to the level of 69 paired with the dollar and 76-77 paired with the euro.
In the near future, monetary support from central banks in the form of lower interest rates and additional injections of liquidity can smooth out the negative effects for the markets. This practice has already been actively used by the People's Bank of China and a number of central banks in the Asian region. Judging by the rhetoric from the central banks of developed countries, and they may soon follow suit. At the moment, market participants, in particular, expect a sharp (by 50 bp) Fed rate cut at the March 18 meeting.
Nevertheless, monetary incentive measures should be perceived more as a tool that can smooth out, but not stop, the pressure on financial assets. A steady restoration of risk appetite among investors, and as a result, an increase in the value of risky assets and the restoration of the currencies of developing countries and the ruble, are possible only when there are signs that the rate of detection of new infections outside of China has begun to decline, that is, the spread of the virus has been taken under control . While the spread of the virus is accelerating, it’s premature to talk about stabilization of the situation in the markets.
Another stabilization factor for markets may be the actions of OPEC + countries that have not yet responded to a significant shock in oil demand. The OPEC + meeting should be held on March 5-6, and by its results, additional production reductions in the countries participating in the transaction are quite likely. Such actions can limit pressure on the oil market, which is certainly important for the ruble. Since 2017, the correlation of the ruble with oil has significantly decreased, however, it cannot be said that it has completely disappeared. The correlation remains closer when oil prices are lower than when they are rising, when they are changing rapidly, and when the price change is due to a shock in demand rather than a shock in supply. These characteristics very clearly describe the current situation in the markets. In addition, oil prices are currently in close proximity to the level of $ 50 per barrel, which corresponds to a price that ensures a balanced Russian budget. Of course, the Russian budget is less sensitive to fluctuations in oil prices than the budgets of many other oil exporting countries, however, we believe that a drop in oil prices below this psychological mark can hardly be ignored by the ruble.
At the moment, in the baseline scenario, we proceed from the fact that on the horizon of the second quarter of 2020, signs of stabilization will appear in the global financial markets if the spread of the virus can be controlled. In the second half of the year, stabilization may be followed by a moderate recovery of the ruble to the level of 64 paired with the dollar and 70.5 paired with the euro by the end of the year. At the same time, coronavirus will certainly have a negative impact on global economic growth in 2020. PMI indices of business activity published in China on February 29 (the composite index was 28.9 points, which is the minimum for the entire history of observations) were one of the first actual data to assess the depth of the current shock. Ahead of the publication of evidence from other regions of the world, where, most likely, there will also be a significant drop. Negative statistics may well become an occasion for additional pressure on risky assets and on the ruble. However, the key factor for the markets remains the dynamics of the spread of the virus. If it declines, a sharp deterioration in macro statistics will be perceived as a temporary phenomenon.
It is worth paying attention to some additional trends. Amid increased volatility in the markets, support from the tax period may not be so noticeable for the ruble. The impact on the ruble of future reductions in currency purchases by the Bank of Russia as part of the settlement of the transaction involving the transfer of Sberbank (MCX 🙂 to the NWF is significantly inferior in magnitude to the impact of the external background on the ruble. Despite a significant weakening of the ruble since the beginning of the year, there are no risks of raising the Bank of Russia key rate yet. Inflation at present (2.4% y / y in January) is significantly lower than the Bank of Russia target mark of 4%. Prior to the current ruble depreciation, there was a high probability that inflation by the end of the year would remain below the target level, therefore, the tonality of the policy of the regulator spoke about future additional rate reductions. Under current conditions, a more likely scenario is to keep the rate unchanged at the next meetings, while the markets continue to have increased volatility. In case of escalation of pressure on the ruble, it is possible to suspend purchases of foreign currency by the Bank of Russia within the framework of the budget rule, following the example of 2018.
The dynamics of inflation in Russia
In the risk scenario, the pressure on the ruble may be sharper and will go beyond the first quarter. Prerequisites for the risk scenario will be continued high rates of virus spread outside of China, creating uncertainty about the final scale of the shock and provoking continued sales in global financial markets, despite support measures from central banks. An additional risk factor is geopolitics. A vivid example was the additional pressure on the ruble on Friday February 28 after the aggravation of relations between Russia and Turkey around the situation in Syria. Sanctions risks are still low, but may escalate as the US presidential election approaches.
Updated exchange rate forecast: