This morning the Russian finance ministry announced that the “ruble is highly undervalued” and committed to selling residual foreign exchange from its accounts. The finance ministry clarified that it is prepared to sell close to $7 billion worth of foreign currency to the open market.
The currency rallied more than 10% on the announcement from its opening level around 66.33. However, it subsequently lost all of the gains made from the intervention chatter and proceeded to trade lower by 2% around 68. As of the time of publication, intervention operations are obvious on the FX market. However, the amount of bids in USD/RUB seems endless.
Yesterday, the Russian currency sold off sharply in a very volatile trading session after a record rate rise, leading to what will enter into history records as the “Black Tuesday” on the Russian foreign exchange market. The USD/RUB pair rallied over 35% from its daily low to its daily high just below 80 rubles per dollar.
Several brokers adjusted the trading conditions on the Russian ruble pairs, or halted trading altogether as liquidity dried up.
Speculation about capital and currency controls are rampant while Russian authorities are pondering what to do. The move of the Russian central bank clearly came too late. The Russian monetary authorities should have been way more proactive around the time of floating the ruble, but instead were bound to political pressure.
Apple has officially announced that its online store in the country would cease operations due to the volatile conditions on the foreign exchange market until further notice.
A Lesson in How NOT to Intervene in Currency Markets
If Russian officials continue with the policy of announcing what they are aiming, willing and prepared to do, the market is likely to react the same way that it did this morning – by shrugging and continuing to sell all rubles at hand.
With the amount of currency committed to intervention known beforehand and a decisive one time action still missing from the market, the central bank’s reserves are simply going to bleed out slowly without having any effect on the ruble exchange rate.
One of the biggest advocates of tougher forex regulation in Russia, the first deputy governor of the Bank of Russia, Serguey Shvetsov, has proven that he has no clue about the foreign exchange market whatsoever. He said it himself yesterday, “The situation is critical, even in my nightmares I couldn’t imagine that this could happen a year ago.”
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Well, Mr. Shvetsov, the currency market is not a roulette as you have referred to it in your statements related to regulating the Russian retail forex market. It is responding to the rapidly deteriorating fundamentals of the Russian oil economy.
Earlier this autumn, the Bank of Russia assumed a worse case scenario of $60 dollars per barrel in order to devise a crisis-response path in the case that the situation might demand decisive action.
Looks like central bank officials haven’t really designed anything, because it took the oil market only a couple of months to get there and the response came only when the situation on the currency market became beyond critical.
The first deputy of the Russian central bank is treating the ruble exchange rate with the same approach – let the roulette spin. But let’s be fair to the central bankers, its the politicians who have been pressuring the central bank from making a decisive move on interest rates which could have stemmed the decline of the Russian currency much earlier.
They even proceeded with filing legal cases with the prosecution against the central bank and its officials.
Russian Stock Market Capitalization Ties With Google
German journalist from Die Welt newspaper Holger Zschaepitz has brought to the attention of his Twitter followers a chart which shows that the current market cap of Google is surpassing the whole wide Russian stock market.
— Holger Zschaepitz (@Schuldensuehner) December 17, 2014
There is only one question which remains on investors’ and the Russian population’s minds – can it get any worse? Recent moves by US and EU governing bodies are contemplating additional sanctions. We risk disappointing some of our Russian readers, but let’s borrow a phrase from US president Barack Obama – “Yes, it can!”