RUB: Focus on the fundamentals
We believe that fundamentals take centre stage in terms of our rouble forecast and we particularly highlight that given the present level of the oil price, the rouble is probably close to 'fair value' in real effective terms. The Russian economy is very likely to fall into recession and in the coming quarters we are likely to see the crisis deepen given the shocks we have already seen. This is likely to make the CBR reluctant to tighten monetary policy much further - particularly taking into account that the CBR is now officially allowing the rouble to float freely. As a consequence, we also believe that the CBR will be eager to avoid a renewed strengthening of the rouble in real terms as this would keep the Russian economy stuck in recession. Effectively, the CBR is likely to accept inflation rising up towards 10% temporarily. This also means that to keep an unchanged real effective exchange rate, the CBR will have to allow the nominal exchange rate to weaken enough to 'make up' for the loss of competitiveness from higher inflation. The debt situation in Russia is becoming increasingly challenging.
All the factors above are likely to weigh on the rouble in the coming year - no matter what happens geopolitically. We expect these factors to be particularly negative on a three-six month horizon rather than a 12-month horizon. However, our view is that the oil price is likely to bottom out in the coming months and will begin to recover in line with a continued pick-up in global growth in 2015. This means the rouble is likely to get increasing support from a higher oil price throughout 2015. This should help reduce the pressures on the rouble in the medium term.
Our new USD/RUB forecast is therefore 49, 51 and 51 on three-, six- and 12-month horizons . Overall, this is slightly more negative than forwards on a three-six month horizon and fairly 'neutral' on a 12-month horizon.
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