Let battle commence. The Russian central bank’s attempt to draw a line in the sand in the rouble’s step-by-step devaluation merely provided a new level for speculators to target. Russia’s currency on Wednesday came within kopecks of breaching the floor of 41 against a dollar/euro basket the bank set on January 22.
The bank indicated it would defend this level unless oil prices fell to $30 a barrel. With Urals blend still about $43, the rouble’s value looks in the right ballpark. The trouble is that currencies tend to overshoot as they decline. The non-deliverable forward market is pricing the rouble 18 per cent lower against the dollar in 12 months. And the bank cannot afford indefinitely to keep burning through its remaining $386bn foreign exchange reserves, which have been falling by $10bn a week since August. Fitch on Wednesday downgraded Russia’s credit rating to two notches above junk, in line with December’s move by Standard & Poor’s, highlighting the pressure on reserves.
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