RUB More Vulnerable to Further Tightening of US Fed Policy in 2016
Since February, the USD/RUB pair has moved 13% lower and has closely tracked the move higher in crude oil. However, this correlation is expected to slightly wane even if the Brent crude price increases more than USD 50/bbl by the end of 2016, according to Lloyds Bank. Russia’s budget deficit is expected to reach 3.7% of GDP in 2016.
The pressure to balance the nation’s widening budget deficit favours a weaker ruble, noted Lloyds Bank. In 2016, the Russian economy is likely to shrink 1.5%, after contracting 3.7% last year.
This increases pressure on the central bank to lower interest rates in the second half of 2016 as inflation continues to decelerate, added Lloyds Bank. Meanwhile, several geopolitical risks related to involvement of Russia in Syria and Ukraine, have not diminished.
According to Lloyds Bank, the embedded currency risk premium linked with the Russian ruble is higher than the levels of 2013.
“This leaves the RUB more vulnerable to further Fed policy tightening later this year, limiting how far USD/RUB is likely to fall in coming months”, added Lloyds Bank.
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