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Foreign Exchange

And the QE3 winner is: RUB

After the Federal Reserve’s announcement of QE3, the question is which currencies are set to benefit the most. RUB looks to be the answer for many.

While interest rates around the rest of the world are easing, Russia delivered a surprise hike in its lending rate on Thursday, boosting demand for the RUB, even ahead of the Fed’s announcement.

The Central Bank of Russia (CBR) raised its key refinancing rate by 0.25% to 8.25%, having left it unchanged since December 2011, signalling an unexpectedly strong commitment to its inflation-targeting regime.

That, combined with the Fed’s action, puts the RUB in a sweet spot, especially given the likely effect of rising risk appetite on the price of Russia’s main exports: oil and gas.

“The Fed has delivered,” says Benoit Anne, head of EM FX strategy at Société Générale. “Now, let’s not overcomplicate things on this and buy risky assets. What we are contemplating here is the possibility of an LTRO-type rally – in other words, not to be missed.”

Anne says that means that in EM, he favours high-beta FX especially where the currency is fairly cheap and where there are limited intervention risks to block the move, and the currency tends to be highly responsive to risk sentiment.

He adds it also helps if domestic drivers are also pushing in favour of a stronger currency.

“With all these things being considered, my top pick at this point has to be the RUB,” says Anne.

Société Générale adds that emerging markets currencies are set to benefit across the board from QE3, with PLN, KRW and MXN positioned as strong investment opportunities.

Peter von Maydell at Credit Suisse concurs. He says FX investors should look to buy RUB after the CBR policy decision.

“Given our expectations for the Fed’s QE3 to boost high-yield currencies and energy prices, we are bullish on RUB,” he says.

In August, Deutsche Bank FX strategist Henrik Gullberg recommended the RUB and the ILS as favourable buys, as Russian and Israeli short-term interest rates continued to post favourable moves.

Gullberg said the RUB should be 3% to 4% stronger than it is, if FX investors consider it is trading cheaply compared with traditional drivers such as the recent spike in Brent crude oil, as well as Russian domestic factors such as the strength of the Russian CDS market.

Other energy commodity-linked currencies, such as the CAD and MXN, are also set to benefit from an environment where the Fed is pursuing an expansionary monetary policy and US economic data is strong, he added.

“We’ve been recommending a long position in the ILS in the RUB for the past couple of weeks,” said Gullberg. “The PLN will also benefit from this environment on a regional basis in central and eastern Europe, especially if the EUR rally can extend.”

According to Voltaire, the philosopher, doubt is “not a pleasant mental state”. With the EUR rally in hand, QE3 behind us and developed world equities markets posting strength, EM currencies look set to strengthen, and RUB looks set to be the star.

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