© Bloomberg. An employee displays ruble banknotes at the retail store of a gas station, operated by Tatneft PJSC, in Kazan, Tatarstan, Russia, on Thursday, March 7, 2019. Tatneft explores for, produces, refines, and markets crude oil.
(Bloomberg) — The analyst who most accurately predicted the ruble’s rally in the second quarter is now its most pessimistic forecaster.
The Bank of Russia’s switch to monetary easing is the reason Jaroslaw Kosaty, a currency strategist at Poland’s largest bank, sees the currency sinking about 9% against the dollar by the end of the year. Foreign investors who piled into local OFZ bonds in anticipation of the cuts are largely done staking out their positions and the Bank of Russia says it expects the non-resident flows to fade, exposing the currency to further interest-rate reductions.
“Fed rate cuts won’t be sufficient to satisfy market expectations in this matter,” Kosaty said. “The negative effects of the Russian central bank’s rate cuts on the ruble will prevail over the positive effects of the Fed actions.”
After its 2018 collapse, the ruble staged the world’s best rebound this year and bond yields plummeted as tougher U.S. sanctions failed to materialize and a shift to loser policy globally fueled a rush into riskier markets. The return of foreign investors to Russian bonds lifted the non-resident share to 30% by the end of May from 24.4% as of Jan. 1.
Kosaty predicts the most pain for the out of 19 analysts surveyed by Bloomberg. His forecast of 69 rubles per dollar compares with their median estimate of 65 and implies a 9.1% slide from the currency’s intraday high last week. The currency was 0.6% stronger on Monday, taking its gain in the year so far to 11.3%.
A second consecutive interest-rate reduction is possible at the central bank’s next meeting and it isn’t ruling out a cut of 50 basis points, Governor Elvira Nabiullina said earlier this month. According to Kosaty, the Bank of Russia will lower rates gradually by 25 basis points in the third and fourth quarters, though a 50 basis-point step is still possible at the July 27 meeting.
There are other threats. Emerging market currencies may eventually take a hit from the U.S.-China trade war and fragility in the euro region, despite stimulus aimed at offsetting the fallout, he said. The possibility the Fed will be more cautious in its rate cuts would also remove support for developing-nation currencies.
“The current economic situation in the U.S. is relatively strong when compared to others, and the Fed won’t easily refrain from maintaining favorable interest-rate parity with the other main economic partners,” Kosaty said. “Consequently, its actions in the coming quarters may seem belated to the market, which has a significant potential for market disappointment.”
(Updates ruble gains in fifth paragraph)
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