It seems like just the other day that the Rouble was in free fall ..... now it's the top performer.

Wednesday 14th December 2016

It seems like just the other day that the Rouble was in free fall ..... now it's the top performer.

ref :- "Trump and oil revival fuel rouble's take-off" , The Financial Times , Markets and Investing

Actually, it was back in January that USD / RUB made its all-time high of Rbs86 per dollar. Back then, the Russian currency didn't seem to have much going for it. The sanctions-hit economy was struggling to emerge from recession and Russia's actions in Ukraine and Syria seemed likely to keep relations frosty with much of the international community. Most crucially, the price of oil upon which Russia relies so heavily was on its knees, knocking around the $30 per barrel level.

And now ? A dollar will get you a fraction over Rbs60 ..... the Russian unit has even managed to rally nearly 9% since the US election when most other emerging market currencies have been under the cosh. It is by some way the best-performing EM currency of 2016 and over the last three months it has been the strongest currency of all.

Obviously, the most important driver of Rouble strength has been the rally in oil prices and the prospect of oil-production quota agreements both within and outside of OPEC staying the course. The currencies of other oil-producing nations have benefitted too (Norway, Canada, Mexico), but if you're pumping over 11 million barrels per day, as Russia does, then you tend to benefit the most. Russia has played a leading role as broker for the OPEC deal and as the producer outside OPEC volunteering to take the largest production cut, but in all honesty with their output at record levels 300,000 bpd seems like a very small price to pay.

Beyond oil, the supine foreign policy positions adopted by the USA, Britain and others means that Russia has faced little or no penalty for its geopolitical adventures. Now, remarkably, it can welcome an incoming US administration seemingly intent on thawing relations between the two countries (and if you believe all you read, one it helped elect). Donald Trump has showered praise on Russia's hard-man leader Vladimir Putin, and is filling key positions in his cabinet-to-be with figures from both commerce and the military known to have warm relations with the Russian leadership.

Some might argue than interest-rate differential plays argue against selling USD / RUB  --  US rates are headed higher (starting this evening) whilst the high levels of interest needed to support the Rouble in its hour of need are on the way down now the currency is in good shape. That's true, Russian rates will probably head lower early in 2017 but at 10% and with a stable currency, an improving economy and falls in inflation, the returns on the Rouble still look pretty attractive.

So should we just sell USD / RUB then, even at these lower levels and at a time when most commentators are talking of more all-round dollar strength for 2017 ? Well, they were saying almost exactly the same thing this time last year and in the event (and as measured by the Dollar Index), the greenback had dropped 7% by May. 

But there are reasons to be cautious ..... Of all the things to have blind faith in, cash-strapped oil exporters having the discipline to stick to production quotas would not rank highly. And as for matters geopolitical ..... it may be all lovey-dovey right now, but one can't imagine Donald Trump reacting with equanimity if he felt Mr Putin was putting one over on him. Some might say if you get into bed with a bear, don't be surprised if ......well, there are numerous versions of that particular metaphor, some more graphic than others and none of them ending well.