Forex Purchases Paused as Ruble Breathes a Sigh of Relief
Ever since the Bank of Russia initiated forex purchases to stabilize the currency, the ruble went into freefall. Now, for the first time since these measures were adopted the Bank of Russia temporarily halted forex purchases and the ruble bounced back. During May 2015, forex purchases in the region of $100 million – $200 million daily were made. However, these reserves were depleted when the central bank attempted to defend the value of the ruble.
As a result, the ruble gained as much as half a percentage point against the dollar as it ended up at 55.704. Since interventions in the currency market began, the ruble slumped by as much as 15% against the dollar. Should forex fears increase, the depreciation in the ruble will lead to higher inflation. Since intervention was halted, the Micex Index gained a percentage point and the RTS Index gained two percentage points.
The reserve bank believes that it has done exactly what was required to intervene in the currency markets. Analysts tend to agree that there is increased flexibility vis-à-vis the purchasing of currency for rebuilding purposes. Since May 13 2015, the Bank of Russia added $3.2 billion in forex reserves. The Reserve Bank Governor, Elvira Nabiullina, intends on increasing forex reserves to as much as $500 billion in upcoming years.
Key 55 Level Reached
Since the ruble hit 55 to the dollar, it is likely that the Russian Central Bank decided to stop buying foreign currency reserves. This value is considered ‘fair value’ to the greenback given the Brent crude oil price. Recently, Brent crude oil reached $64.95 per barrel after recording an almost 4% spike. For its part, the Bank of Russia is limiting its involvement in forex purchases for fear that it will reinforce negative sentiment regarding the ruble. Following on from this news was a rise of 13 points for 5-year government bonds to 11.17%.
100 Basis Points Rate Cut on the Cards
The Bank of Russia is looking to cut its lending rate by 100 basis points in coming days as the economy shows signs of faltering. Already the rate has been cut by as much as 12.5% during 2015. At this time, there appears to be no end in sight for the downward spiral of the Russian economy. Some of the concerns that remain in effect are persistent ruble weakness and ongoing inflationary fears. When polled, Reuters’ 24 economists expected a rate cut of 100 basis points.
Inflation subsided from 16.9% in April 2015 to 15.8% in May 2015. Since the middle of May 2015, the Russian ruble has lost as much as 11% to the USD. The interventionist policy adopted by the central bank led to analysts opting for caution where rate cuts are concerned. Meanwhile the size of the rate cut envisioned by the central bank is not yet clear. Elvira Nabiullina cautioned that too much of a rate cut would endanger the Russian economy.
Author’s Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting and CFD trading company – Intertrader.
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