We heard lately that Russia intends to continue to operate in a floating regime concerning its exchange rate despite a [two-quarter] sell-off of the currency. USDRUB is now trading at an all-time high of 42.85, and we are asking ourself how far we could go…
If we refer to last week’s chart on Oil Breakeven prices (see article Chart of the day: Oil Breakeven prices), we can see that Russia needs oil price at around $100 (per barrel) in order to be ‘breakeven’, which is approximately $15 more than the current level (COX4, which corresponds to Brent November 2014 futures contract, is now trading at 84.50). Therefore, this is Putin’s first issue as the country’s Government budget deficit will widen to ‘scary’ levels if the situation persists.
In addition, with a current annual core inflation rate of 8% (September), the central bank (CBR) cannot let its currency depreciate for so long as the country will experience high inflationary pressures in the medium term (2nd issue).
However, has the country got sufficient Foreign Exchange reserves in order to defend its currency in the medium term?
According to official figures, Russia’s International Reserves (split between Foreign exchange reserves and gold) decreased by $73bn to 443.8bn (USD over the past year (and are down $155bn since historical high of 598.1bn USD). The country holds 1,149 tonnes of gold (With a bit more than 10% of the total reserves, Russia is the 6th biggest holder of gold in the world) and invested $118.1bn dollars in US Treasuries. In addition, by signing new deals with China (Last May, 30-deal of $400bn to jointly produce and deliver 38bn Cubic meters of natural gas), the CBR holdings of CNY have started to increase drastically (not sure about the figure yet). As a reminder, Russia signed a three-year swap deal of 150bn Yuan a couple of weeks ago that aims to make bilateral trade and direct investment (therefore, bypassing the US Dollar). China is already Russia’s largest trading partner, with an annual turnover of $89bn in 2013. According to PM Medvedev, this figure could increase to 200bn USD by 2020.
Based on those figures, the country is quite safe and the central bank has strong capital to intervene in the market if it judges the situation unsustainable (unlike Venezuela or Argentina). However, where is the high?
Quick Chart on USDRUB:
As the pair trades at an all-time high, I like to look at the Fibo retracements to find out where I can set up the next resistance on the pair. Based on the 23.0520 – 36.5590 retracements as you can see it on the chart, the next resistance on the topside stands at 43.35, which corresponds to half of the previous range (6.75 RUB approx.).