Ruble Devaluation

The ruble continues to fall against all other currencies. Efforts by the Russian central bank to firm up the ruble by raising interest rates were unsuccessful. We pose the question; will there be ruble devaluation similar to those in Argentina over the years? The New York Times speaks of the futility of the most recent interest rate increase by the Russian central bank.

Despite the decision by the Central Bank of Russia to raise its short-term interest rate in the middle of the night to 17 percent from 10.5 percent, the value of the currency continued to slip on Tuesday after initially showing signs of stabilizing. The interest rate move came after the ruble fell 10 percent on Monday.

In afternoon trading, the Russian currency resumed its fall to record lows, with the dollar rising above 79 rubles in spite of the bank’s policy shift.

Of particular concern in the financial markets were fears that the Kremlin had in effect decided to print money to address a growing debt problem. Worries that the central bank had effectively issued new rubles to prop up the national oil company Rosneft were among the factors that prompted the dramatic sell-off of rubles on Monday.

As the ruble falls ruble devaluation becomes a possibility. Otherwise the more apt comparison would be Germany during the Weimar Republic when people carried a wheel barrel full of money to the bakery to buy a loaf of bread. How can a trader address a possible ruble devaluation?

Trading During a Currency Devaluation

Do you want to get caught in a trade at the time of a ruble devaluation? According to Investopedia devaluation is:

A deliberate downward adjustment to the value of a country’s currency, relative to another currency, group of currencies or standard. Devaluation is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate. It is often confused with depreciation, and is in contrast to revaluation.

As a general rule currency devaluation is announced when local markets are closed, that is to say when Russian businesses are not open. Traders wishing to be out of the market at the precise time of ruble devaluation may which to pick the market closest to Russia, London, to day trade.

Trading a Ruble Devaluation, Market Inefficiency

The Cambridge Dictionaries Online define market inefficiency as follows:

a situation in which a financial market does not operate as well as it should, for example where customers do not have enough information about products, prices are not related to supply and demand, etc.

At the moment of a ruble devaluation no one has all of the critical information to make efficient trades. However, if the market has been expecting ruble devaluation it will have discounted many fundamental factors. And the market has a tendency to overshoot. Here is where traders can use technical analysis tools and take advantage of extreme market sentiment swings and an inefficient market. For those anticipating a ruble devaluation a contrarian view is to set up a trade in expectation of devaluation and hope that market corrections do not remove profits after a ruble devaluation.