High currency risk premium to act as headwind against Russian ruble

Flat performance of the Russian ruble against the U.S. dollar in the past month indicates towards decoupling between crude oil and the ruble, noted Lloyds Bank in a research note. Instead, the focus has moved towards domestic interest rates in Russia given the ruble’s relative attractive carry as compared to the other emerging nations.

The sluggish economic growth and decelerating inflation have raised the possibilities of the Russian central bank lowering the interest rate further, said Lloyds Bank. Similarly, the requirement to bring fiscal accounts of Russia closer to balance imply that there are restrictions  to how much further the Russian ruble would appreciate in the forecast period.

Ruble strength is expected to be curbed by Russian central bank’s intervention. The central bank last time intervened between May and July 2015 and the pair USD/RUB traded between a rage of 61.76 and 48.13 against the US dollar. The Russian ruble would continue to face headwind from a high currency risk premium, related to geopolitical risk factors. The currency pair, USD/RUB, is expected to trade at around 64.00 by the end of 2016 and at about 62.00 by the end of 2017, added Lloyds Bank.