The ruble ended five days of losses as the Bank of Russia stopped daily purchases of foreign exchange, signaling policy makers don’t want to add impetus to the currency’s decline before an interest-rate decision this week.
The ruble rallied as much as 1.8 percent after the central bank said it was suspending a program of buying as much as $200 million daily. The currency also got support from Brent crude bouncing back from a six-month low. A five-day rout through Tuesday almost wiped out the ruble’s appreciation this year, sending it past 60 to the dollar for the first time since March.
“The ruble pushing above 60 was a tipping point,” Daniel Hewitt, an analyst at Barclays Plc in London, said by e-mail. “Foreign-currency purchases were using up foreign exchange available on the market and therefore causing ruble weakness.”
Calling off the purchases just two days before the next interest-rate decision shows the struggle the central bank faces at reining in inflation without curtailing revenue from energy exports that are denominated in dollars. The ruble has swung to the worst performance in emerging markets from the best since the purchases started at the height of the currency’s rally in mid-May.
Since then, oil prices slid into a bear market, dragging the ruble down with them and leading analysts to question the sustainability of the central bank program, which was meant to seize on currency strength to rebuild foreign reserves from seven-year lows.
The exchange rate gained 1.7 percent to 59.00 per dollar by 6:45 p.m. in Moscow, having fallen to as low as 60.937 yesterday. The optimism spread into the bond market on speculation the move will make it easiegtr for the Bank of Russia to push through its fifth straight interest-rate cut on Friday.
Derivatives traders more than doubled their bets on a decline in borrowing costs after the announcement to 28 basis points over the next three months, according to forward-rate agreements. Bonds rose, sending yields on five-year notes down 32 basis points, the most since April, to 10.86 percent on Wednesday after climbing for seven straight days.
That helped the Finance Ministry sell all of the 10 billion rubles ($168 million) of floating-rate debt due in December 2017 it offered at an auction today after receiving bids valued at more than double that level.
Dmitry Polevoy, the chief economist for Russia at ING Groep NV, said the “overall conditions improved a bit” for the market. Morgan Stanley analysts led by James Lord said it was wary of taking the central bank move as a reason to become “structurally bullish.”
Even though the ruble has dropped 6.2 percent this month, Brent crude, used to price Russia’s main export grade, has fallen faster, dragging the price of oil in ruble terms to the lowest level since April.
The drop poses a risk to state revenue as analysts project Russia’s fiscal deficit will be the widest as a percentage of economic output since 2010. On the flip side, the ruble’s slide may restoke inflation after the rate fell for a third month to 15.3 percent in June.
When the Bank of Russia started selling rubles in May, some analysts said the monetary authority was moving away from the free float it adopted last November toward a more managed regime, something policy makers have denied.
Since the daily purchases were relatively small scale, “their removal is positive news, but is not really a game changer,” according to Vladimir Osakovskiy, the chief economist for Russia at Bank of America in Moscow.
By Vladimir Kuznetsov & Olga Tanas