Preventing a Stronger Ruble

The Bank of Russia is preventing a stronger ruble as it purchases $200 million for Forex reserves. NASDAQ reports on the actions of the Russian central bank.

The Bank of Russia continued to intervene in the foreign exchange market last week after it bought another $ 200 million, the bank said on Monday.

The central bank-which reports its currency market activities with a two-day lag–made the intervention on Thursday. The bank is aiming to replenish Russia’s foreign currency reserves after it spent billions of dollars to defend the plummeting ruble on the back of fall in the price of oil and the economic sanctions that have been imposed on Russia by the West in reaction to Moscow’s support of the separatists in eastern Ukraine.

As the Russian central bank is learning, it takes continued attention to support or suppress a national currency. The bank expects to buy $100 million to $200 million a day and has bought around $1.4 billion since the middle of May.

The Surprising Ruble Recovery

The ruble has been the star Forex performer this year. The Washington Times writes about the ruble rebound.

Five months ago, the Russian central bank needed a middle-of-the-night interest rate hike just to keep the battered ruble from collapsing on international currency markets as the Russian economy faced Western sanctions, a falling credit rating, capital flight and collapsing prices for its prime exports, oil and natural gas.

Five months later, the ruble is one of the surprise star performers of 2015’s currency markets, rising to its highest point against the dollar since 2013, and forcing the central bank in recent days to take steps to try to keep it from appreciating in value too fast. Having briefly touched 79 rubles to the dollar in mid-December, the Russian currency is now trading at just over 49 rubles to the dollar.

According to an index compiled by JPMorgan, the ruble is the best-performing currency among emerging markets around the world so far in 2015. The Russian stock market, which also plummeted in 2014, is up 25 percent so far this year.

Russia has two good reasons for preventing a stronger ruble. Buying dollars rebuilds its currency reserves and keeping the ruble low makes Russian exports more profitable. Oil and gas exports are denominated in dollars so the profits are higher when converted back into rubles.

What Is Next?

According to Market Watch the ruble is at a crucial tipping point.

Resurgent crude-oil prices have been a huge boon for the ruble this year. If Brent crude can hold above $60 a barrel, the ruble’s rally will likely continue, Cieszynski said. Technical indicators suggest that it will next meet resistance around 44.20 to the dollar, it’s 50% Fibonacci retracement.

While the central bank is preventing a stronger ruble by purchasing dollars the Russian oil and gas industry in enjoying a mini boom due to slightly recovered oil prices. In the medium to longer term the continued recovery of the ruble and the need for preventing a stronger ruble will depend on two things. One is the price of oil. The other is whether Russia and the West will come to terms over Russian annexation of Crimea and support on rebels in Eastern Ukraine.