RenCap: Rouble’s recent weakening predictable

Investment bank Renaissance Capital argues that the weakening of the rouble over the past few weeks has been predictable and is mainly the result of post-lockdown increases in consumption and in demand for imports and foreign currency in Russia.

On July 31, the rouble hit its lowest mark in three months, dropping to a little more than 74 to the U.S. dollar.

“We believe that the current weakness of the rouble is more likely to be a predictable adjustment to its fair value,” Sofya Donets, RenCap economist for Russia and the Commonwealth of Independent States, said in a report.

Domestic consumption had returned to its July 2019 levels, she said. Consequently, demand for imports had gone up.

Demand for foreign currency had gone up because interest rates on rouble bank deposits had slumped to “historical minimums”, the government had promised to lift Covid-19 restrictions on foreign travel, and there were fears of a second wave of Covid-19.

One more reason for the current weakening of the rouble is that over the past 15 years August has regularly been a month in which Russia’s currency was sinking, Donets argued.

Donets said that, in RenCap’s base case scenario with Urals oil priced at $40 per barrel, the rouble’s “fair exchange rate” should be about 73.5 per dollar.

RenCap sticks to its forecast that the rouble will stay between 73.6 and 76.1 versus the dollar around the end of 2020 and the beginning on 2021, according to Donets.

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