Quick analysis on Russia and the Ruble

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.).

RUB29OCT(1)

(Source: Reuters)

Chart of the day: Oil Breakeven prices

After Saudi Arabia’s quiet talk on the fact that the country is comfortable with lower oil prices for an extended period of time, some countries are trying to find out some ‘measures’ to push up prices to ‘decent levels’. Brent November (2014) futures contract (COX4 Comdty)  is now down more than 25% since the end of June levels ($113 per barrel), trading slightly below $85.

We read that the Oil Storm is posing (and will pose) a problem for Russia (in addition to all the sanctions) and other OPEC countries. Therefore, we added today this chart (Source: DB) that shows you the Breakeven prices of all the big oil ‘players’.

For instance, Venezuela – OPEC member where oil revenues account for 95% of export earnings – called for an emergency OPEC meeting (next one stands on Nov. 27th) as current oil prices will hit its currency reserves. According to the chart below, the country needs a barrel at $120 to be breakeven (aka pay for its imports).

Let’s see what is the other countries’ breakeven…

OPEC-Chart(1)

Recovery mode after market turbulence

Markets have been pretty shy this week, with equities recovering after two weeks of ‘correction’.
The S&P500 found support slightly above the 1,900 level on Friday after a 4.35% decline since July 24 high of 1,991.39. Market sentiment worsened as Obama launched another Iraq Assault, with traders potentially willing to put on some bearish positions; however it seems to me that markets don’t seem to be able to handle increasing risk well. AUDJPY eased 150 pips to find support at 94.40, which means that we reached our target of 94.60 based on our previous trade recommendation (see here).

AUDSP(2)

(Source: Reuters)

Another sharp move was in the German market with the benchmark DAX index (blue line) off more than 11% between July 2 high (10,032.28) and last Friday’s low of 8,903.49. If you add the French and UK benchmark indexes (FTSE100 in red and CAC40 in orange), you can see that they had approximately the same path (see graph below), both down 4.3% and 7.5% respectively.

Equities(1)

(Source: Reuters)

The single currency remains under pressure after last week equities sell-off and disappointing fundamentals. EURUSD is trading at a 9-month low, slightly below the 1.3350 level, after German ZEW survey came in well below expectations yesterday as geopolitical tensions and the sluggish recovery weigh on the European’s largest economy. Russia is one of Germany’s main trading partners, therefore there are signs that the German economy will grow at a lower rate than expected in 2014. As a reminder, final Q1 GDP came in at 0.8%; growth is expected to be flat on Q2 according to analysts’ first estimates.

Traders will watch EZ Q2 GDP first estimate and the final July CPI tomorrow, which are expected to come in at 0.1% QoQ and 0.4% YoY respectively. We are still bearish on EURJPY (entered at 137.20 with a MT target at 134.10), mainly based on a Euro weakness (ECB easing in addition to poor fundamentals).

Yen: The BoJ two-day meeting didn’t change any forecast on USDJPY, and the pair is still stuck within its 101-103 range for the past four months (couple of exceptions). Equities sell-off (Nikkei index down 1,000 pts between July 31 and Aug 8) combined with low US yields (10-year bottomed at 2.35% on Friday and is now trading slightly above the 2.40% level) played in favour of the JPY. USDJPY was sold to 101.50 on Friday and is now trading in the middle of its 200-range. Last night, we saw that Japan Q2 GDP collapsed by 6.8% according to Japan’s Cabinet Office (slightly less than the 7.1% expected), its worst contraction since 2011. While inventories additions added 1.0% growth, consumer spending fell 5.2% QoQ after the nation increased its sales tax from 5 to 8 percent on April 1st. We will get back to Japan this week with an article focused on its economic outlook and what are BoJ policymakers’ options.