Why has the rouble rebounded? | beyondbrics

Why has the rouble rebounded? | beyondbrics:



"The Russian rouble has moved from above 70 to the US dollar in late January to around 50 in mid-April, making it one of the best-performing currencies in the world this year. This is particularly remarkable as the dollar has been quite strong during this period, continuing to appreciate against the euro. So, what is behind this sudden rouble strength?



For most of last year, the rouble traded on the oil price and geopolitics, so it could be assumed that either of those two factors has changed materially. The oil price has moved from $56 to $60 per barrel this year, and the so-called Minsk II agreement was reached on February 12. Is that enough to explain the recovery? Probably not, especially considering that the oil price has been flat over the past two months while the rouble rallied the most. The rouble thus seems to have de-correlated from the oil price, at least partially and temporarily. And there has been fairly broad international scepticism over the Minsk II agreement (which we do not share by the way), making it difficult to believe that that is the reason behind the rouble’s strength.



But what about the Russian economy in general and monetary policies in particular? The fact that the economy stayed in positive territory in 2014 – 4Q14 growth came in better than expected at 0.3 per cent – only gives weak comfort, as the more recent investment and consumption data imply the economy is decelerating rapidly, with the Economics Ministry estimating that growth fell 2.3 per cent y-o-y in February. More importantly for the currency, inflation accelerated more than anticipated, from 11.4 per cent to 16.7 per cent, and the policy rate was slashed by 300 bp, to 14 per cent, during the first quarter. This is hardly a combination that suggests currency strength."



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