RUB: Positive outlook riddled with risk

The Russian ruble saw a strong run in October following higher gas and energy prices, although the rally has moderated more recently due to the rise in front-end G10 rates. The rise in energy prices hasn’t been the only supportive factor for the ruble, however. The early and consistent hiking cycle by the Central Bank of Russia meant the ruble’s carry appeal has increased over the past quarter, while the CBR’s swift responses to upside inflation surprises have shielded the currency from downwards pressures. With the central bank standing ready to tighten policy further if needed, which serves as a safeguard for inflation expectations hitting the fan, we argue that there is scope for further ruble appreciation as a result. Additionally, expectations of high energy demand over winter further support a case for a stronger ruble given Russia’s position as a net exporter. While most arrows point in favour of a RUB rally, a major downside risk to the currency outlook has emerged as the Covid case count, along with related deaths and hospitalisations, stand at record-highs and first steps have been taken to slow the surge. Furthermore, political tensions around Belarus have escalated quickly recently, which means our overall conviction of sustained RUB strength is lower than previously.

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Author: Ima Sammani, FX Market Analyst

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