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From last two months, crude oil prices have recovered from the bottoms of 26.03 in February to the current 37.29 levels, thanks to production outages in Iraq and Nigeria, faster than expected US shale production declines and reports of negotiations between OPEC and Russia on production freezes.
In January, the World Bank had lowered 2016 forecasts for 37 of 45 commodity prices, including oil.
Even though the commodity market was in consolidation pattern in February 2016, but March month series have been very tepid, crude at that juncture has also struggled at 41.80 levels.
So, with inventory overhang still large, it is hard to argue for further rapid gains in oil prices.
Finally, many risk appetite positives now appear to have materialized already with data stabilization in the US and G3 central bank dovish innovations.
Nevertheless, we continue to see idiosyncratic positives for the RUB especially against the other EMEA high yielders and RUB remains our favourite FX OW in our region.
Russia has a much stronger BoP position compared to other EMs like TRY and ZAR. Real yields are materially higher than in TRY and ZAR and nominal carry is among the highest in EM.
Since, crude oil is quoted in USD so that each uptick and downtick generates immediate realignment between the greenback and numerous FX crosses.
These movements are less correlated in nations without significant crude oil reserves, like Japan, and more correlated in nations that have significant reserves, like Canada, Russia, and Brazil.
The energy sector serves as the Russian Federation’s main driver of economic growth. Russia is the world’s largest exporter of refined petroleum products and natural gas and second largest exporter of crude oil.
In the past month, oil has remained the dominant driver of USD/RUB. The pair is currently at its peak levels observed back in January and August of this year (~70).
With the 3m correlation between oil and USD/RUB at ~-0.70 and crude oil currently sitting at $38 (WTI) a barrel, a lack of recovery in oil anytime soon means the ruble is likely to continue facing headwinds.
Prolonged RUB weakness may in turn increase inflationary pressures, which may reduce the probability of CBR cutting in the next several meetings. Oil at USD35/b will also negatively impact growth.
RUB positioning has also turned positive in recent times after crude gaining stability.
long 2M USD/RUB 1x2 put spreads (66/64), as the RUB rally now looks mature for outright directionally bullish positions against the USD.
