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16 Dec 2014
CBR shows the bazooka, but markets remain unimpressed – TDS
FXStreet (Barcelona) - Cristian Maggio, Head of Emerging Markets Research at TD Securities, notes that in an emergency meeting around 10:00PM yesterday, the CBR hiked the key rate by a large 650bp to 17.00%, but failed to excite the markets.
Key Quotes
“While yesterday’s decision is the largest single hike delivered by the CBR since the introduction of the new policy rate (and since the 1998 default), the effect on USDRUB has been almost nil. The pair is currently trading at around 63.85 or some 0.6% lower on the day, after briefly falling to 58.26. But as the RUB yesterday likely recorded one of the largest single-day moves on record (RUB down -9.3% vs. USD and -9.1% vs. EUR yesterday), USDRUB is now back to the topside of that trough-to-peak move.”
“This dynamic raises a big question and highlights an enormous risk. The question is: can the CBR stem currency pressure using interest rates? And the risk is: even when the CBR shows readiness to use this tool in an apparent appropriate manner, the market remains unimpressed, leaving the CBR without effective measures to counter market pressure.”
“In conclusion (and in order to clear the way from misunderstandings) if even such a large-scale hike cannot pare back more than a few percentage points of RUB losses from the previous trading day (and as we write this line, USDRUB is nearly back to its all-time highs), than we can unmistakably say that Russia has a big problem. The unintended consequence of yesterday’s decision is that the CBR has now exposed the limits of tightening.”
“The CBR has implicitly decided to sacrifice the economy for a better good - financial stability. If oil prices and rates stay where they are until well into next year, expect contraction of Russian GDP in multiples of a percentage point. Additional tightening is possible, but clearly not advisable if this is the outcome.”
“So what’s next? With a massive rate hike not curing the ruble’s ills, we can now expect some large-scale FX intervention. So be prepared for abrupt moves today and in the coming days.”
“But when even this fails, the only logical conclusion is that Russian authorities will have to start imposing selective capital controls.”
Key Quotes
“While yesterday’s decision is the largest single hike delivered by the CBR since the introduction of the new policy rate (and since the 1998 default), the effect on USDRUB has been almost nil. The pair is currently trading at around 63.85 or some 0.6% lower on the day, after briefly falling to 58.26. But as the RUB yesterday likely recorded one of the largest single-day moves on record (RUB down -9.3% vs. USD and -9.1% vs. EUR yesterday), USDRUB is now back to the topside of that trough-to-peak move.”
“This dynamic raises a big question and highlights an enormous risk. The question is: can the CBR stem currency pressure using interest rates? And the risk is: even when the CBR shows readiness to use this tool in an apparent appropriate manner, the market remains unimpressed, leaving the CBR without effective measures to counter market pressure.”
“In conclusion (and in order to clear the way from misunderstandings) if even such a large-scale hike cannot pare back more than a few percentage points of RUB losses from the previous trading day (and as we write this line, USDRUB is nearly back to its all-time highs), than we can unmistakably say that Russia has a big problem. The unintended consequence of yesterday’s decision is that the CBR has now exposed the limits of tightening.”
“The CBR has implicitly decided to sacrifice the economy for a better good - financial stability. If oil prices and rates stay where they are until well into next year, expect contraction of Russian GDP in multiples of a percentage point. Additional tightening is possible, but clearly not advisable if this is the outcome.”
“So what’s next? With a massive rate hike not curing the ruble’s ills, we can now expect some large-scale FX intervention. So be prepared for abrupt moves today and in the coming days.”
“But when even this fails, the only logical conclusion is that Russian authorities will have to start imposing selective capital controls.”