The foreign exchange market unexpectedly reacted strongly to the announcement of an extraordinary meeting of the Board of Directors of the Bank of Russia and the subsequent reduction of the key rate from 14% to 11%: the dollar exchange rate rose in 2 days from 56 to 66 rubles per dollar. This happened despite the fact that the yield of three–month swaps for the key rate at the beginning of the week was about 11.5% - that is, the market as a whole was set to reduce the rate to 10% on the horizon of three months.
Given the sharp increase in the volume of trading on the Moscow Exchange for transactions with dollars – on Wednesday and Thursday, 2.5 times more currency was sold than on similar days a week earlier – I attribute what is happening to the deferred demand for currency. Players in the market have long been ready to purchase currency, but were waiting for the most interesting rate to enter the position.
This week, the strengthening of the ruble should resume under the influence of the trade balance. Oil and gas prices remain high, as well as export earnings, a sharp rebound in imports in the current conditions looks unlikely. The yield in the ruble still remains very high in order to cause a sharp and steady change in capital flows – the differential between internal and external rates remains significant and overrides devaluation risks. Trading on the yuan exchange is one of their alternatives to saving in rubles – although they have updated their highs, reaching 33 billion rubles, they are still 10 times less than the total turnover in dollar and euro trading. The volatility of forecasts for the week ahead is certainly very high, but its re-strengthening to the levels of 62 rubles / USD is quite likely.
At the same time, it is unlikely that the market will be able to surpass the previously achieved lows in the euro and the US dollar, since it is now obvious that the Bank of Russia is ready to go for a subsequent reduction in the key rate – the dynamics of inflation and inflation expectations allow for such a possibility. Inflation over the past 4 weeks has slowed to 0.36% over the period and roughly corresponds to the trajectory of achieving the target inflation rate of 4%. The normalization of inflation is likely to be temporary, since the slowdown is largely caused by the correction in prices for non-food products after the March rise in price.
By the end of 2022, we still expect the ruble to weaken to the level of 70-80 per dollar, subject to a decrease in export revenue coming to Russia and some recovery in imports.
