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Revised Liquidity Provisions do little to Aid Virtually Parabolic USD/RUB

Revised Liquidity Provisions do little to Aid Virtually Parabolic USD/RUB

Rob Pasche, Kara Dailey,
Revised Liquidity Provisions do little to Aid Virtually Parabolic USD/RUB

Talking Points:

  • In latest round to reduce ruble depreciation CBR limits liquidity provisions to 2 billion/day
  • Gold Reserves increase 6.8% to hedge against dollar linked risks
  • Despite Free Float Efforts USD/RUB still on ascension path

In review of the ruble’s performance, the Central Bank of Russia has taken additional measures to secure the currency’s stability through the implementation of new foreign exchange provisions and the purchase of gold.

In defending the ruble, international reserves were depleted by 82 billion dollars under the initial strategy of unlimited intervention through the purchase/sale of FX. In the ten months to October the foreign exchange component of international reserves was down 16% or nearly 72 billion dollars. Facing a potential credit downgrading from Moody’s, the central bank moved to mitigate this negative impact on the balance sheet through introducing FX repos and limiting the level of FX intervention.

In late October the bank publicized a new instrument, the FX Repo. These swaps between the US dollar, Euro and Ruble were to provide liquidity to the banks through mid-2016 on a one week or 28 day basis and amount to no more than 50 billion dollars. Soon thereafter on November 5th intervention was further limited on a daily basis, strictly amounting to the 350 million dollars that automatically moves the ruble band. With their efforts still unrealized in the rubles trade value, additional measures have since been undertaken.

In the most recent move to carry out operations on a returnable basis, the central bank announced today a limit of 2 billion per day, to extend through November 30th, would apply to liquidity provisions regarding currency swaps. The goal: to limit the amount of rubles available to buy dollars and thereby slow the ruble sell-off. The downside risk being an indirect limit to ruble credit which if bounded could potentially slow economic growth and invoke more stringent bank measures.

To hedge against such dollar linked risks the central bank has heightened their demand for gold as part of a diverse reserve asset management strategy. The purchase of gold in Q2 was up 28% among central banks including Russia who as of June assertions the 6th largest holding of gold. From January to October Gold as a portion of Russia’s international reserves increased 8.6%, from a value of 41.7 to 45.3 billion dollars.

However, despite this exhaustive list of measures taken to stabilize the ruble, Russia’s currency continues to depreciate at a fairly rapid pace. With the USD/RUB going parabolic, risks are heightened making trading in either direction dangerous.

USD/RUB Daily Chart

dailyfx usd/rub daily chart.

Chart Created by Rob Pasche Using MarketScope2.0

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