The Russian ruble has remained under pressure this year as the impact of sanctions and a stronger US dollar continued. The USD/RUB pair was trading at 104.50, down by 8.8% from the highest point this year. It has shed about 14% of its value this year. Here’s why the USD to RUB would be a good carry trade pair.
Bank of Russia interest rate decision
The USD/RUB exchange rate has been in the spotlight as the Russian war in Ukraine started.
It was trading at 78.2 before the war started and then surged to 154 as more countries implemented large sanctions on Russia. The Russian ruble then strengthened to 50.72 in June 2022.
It has then weakened by over 106% even as the Russian economy remained resilient. Recent data showed that Russia has an unemployment rate of 2.3%, much lower than US’s 4.2%. Its rate remains much lower than the pandemic-era high of 6.4%.
Russia’s GDP has also continued to do well, helped by the increased military spending. As a result, recent data showed that Russia had a GDP growth of about 3.1% in the last quarter.
The challenge, however, has been that Russia’s inflation has remained high in the past few months. Recent data showed that the headline Consumer Price Index (CPI) rose from 8.5% to 8.9% in the last month. The CPI has grown steadily from last year’s low of 2.3%.
Russia has also been hit by the ongoing trends in the energy market, where Brent and West Texas Intermediate (WTI) have retreated by double-digits this year. Energy is an important part of the Russian economy because it is the biggest export and cash generator.
The next important catalyst for the USD/RUB pair will be the upcoming Bank of Russia interest rate decision. Economists expect that the bank will continue hiking interest rates in a bid to bring inflation down.
The central bank started hiking rates in July last year, moving them from 8% to 21% today. Analysts expect the bank to continue hiking rates this week, moving them from 21% to 23%.
RUB and USD carry trade opportunity
In an ideal situation, the divergence between the Federal Reserve and Bank Rossii would make a great carry trade opportunity.
A carry trade is a situation where people borrow from a low-interest rate country and invest in higher rate country.
In this case, the Russian central bank is hiking rates, while the Federal Reserve is cutting them. Economists expect the Fed to cut rates by 0.25% in its meeting on Wednesday this week.
If this happens, it means that the Fed has now slashed rates by 1% as it continued to engineer a soft landing for the economy.
Fed’s rate cuts and Bank of Russia’s hikes, have led to a wider spread, which would be ideal. The challenge, however, is that the Russian economy is suffering from substantial sanctions such that a carry trade would be almost impossible.
Russia has also embarked on currency controls, where it has made it highly difficult for people to move cash from the country.
USD/RUB technical analysis
The weekly chart shows that the USD/RUB exchange rate has been in a steady uptrend in the past few months. It recently crossed the important resistance level at 102.30, its highest swing in October last year.
The USD/RUB pair has formed a rising triangle pattern, a popular bullish sign. It has also remained above the 50-week and 100-week moving averages.
Therefore, the pair will likely continue rising in the near term. If this happens, the next point to watch will be at 114.48, the highest point on November 25.
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