Pedestrians pass the entrance to the headquarters of Russia’s central bank in Moscow. The central bank announced on Wednesday that it would limit daily interventions to $350mn, a fraction of the amounts it has been selling for many weeks to support the rouble.
Reuters/London
The rouble crashed to new record lows yesterday after the central bank stepped back from its daily multi-billion dollar currency interventions, with Russian assets generally bucking a more stable emerging markets trend.
The central bank announced on Wednesday that it would limit daily interventions to $350mn, a fraction of the amounts it has been selling for many weeks to support the rouble, a decision investors have interpreted as an effective move to a floating exchange rate.
This follows dollar sales of almost $30bn last month.
While most emerging assets were stable ahead of a meeting of the European Central Bank and benefiting from a slightly softer dollar – which pulled back from four-year high against a basket of major currencies – Russian markets extended their slide.
Aside from heavy demand for dollars from companies facing debt repayments, the rouble is also taking a hit from oil’s slide to four-year lows and a worsening economy – recent data showed high inflation and a sharp service sector contraction.
“In the current kind of economic situation, yesterday’s measure, which nearly floated the rouble, failed to cause a U-turn in the market mood, because there is still no alleviation of the shortage of foreign currency,” said Tatiana Orlova, senior Russia economist at RBS.
The rouble fell 1% to 45.3 per dollar while dollar-denominated Russian stocks slid 0.6%. Rouble-denominated equities however rose for the eighth straight session.
Rouble one-month implied volatility – a gauge of expected swings in a currency – rose to new record highs around 24.5%. Orlova said the focus was on the central bank’s plan to provide short and medium-term foreign currency financing to banks, through agreements known as repo loans.
“If the central bank manages to inject substantial FX liquidity through the first auction, this will be a positive signal,” she added.
Russian dollar bond yield spreads were at the highest in almost two weeks, a day after state-owned Gazprom sold a one-year dollar bond at a 4.45% yield, roughly a 100 basis point new issue premium, the first Russian issue since summer.
A bond trader in London said the deal had risen 0.75 cents already, bringing yields back towards the existing Gazprom curve. Fund managers said the issue showed that Russian companies that are not under sanction could come to market, albeit at a price.
“It shows there is market access which is good. But the question for me is: Why on earth would Gazprom want to pay so much for just one year cash?” said Angus Halkett, a fund manager at Stone Harbor Investments. Despite the yield the bond was not alluring because of its short tenor, Halkett said, adding “there is no capital appreciation element to it, you pick up the yield and that’s it.”
Broader emerging markets were somewhat more stable, with MSCI’s emerging equity index flat after Wednesday’s 0.8% fall.
Asian currencies inched higher for the most part, with the exception of the South Korean won which hit 14-month lows after a top official said the currency would be “managed” to bring it in line with the weak Japanese yen.
In emerging Europe, the Czech crown was flat before a meeting of the central bank, which is expected to signal additional measures to boost the economy.
The Polish zloty was likewise flat a day after the central bank surprised markets by leaving rates unchanged but bonds fell, with two- and five-yields jumping to three-week highs.