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Foreign Exchange

Rouble set to play catch-up as oil prices surge

Rising oil prices have not yet been reflected in the price of the rouble, but that could change if tensions in the Middle East escalate and as concerns ease over Russia's domestic situation.

Heightened worries about Iran have seen the price of oil rise to a record in sterling terms, while it also stands close to an all-time high against the euro. So far, however, the rouble, which historically has the highest correlation among emerging market currencies to the price of Brent crude, has lagged behind the price of oil.

Similarly, while the rouble has strengthened since the start of the year as risk appetite has improved, it has lagged the gains in other emerging market currencies.

Against the dollar, the rouble is up 8% this year, but that is well short of the performance seen in the Hungarian forint and Latin American currencies.

This might indicate that some catching up is overdue, especially in the face of further gains in the oil price.

 Rouble lagging the oil price

 
 Source: SG, Bloomberg

  Furthermore, some see potential for domestic factors to support the rouble in the coming weeks.

Benoit Anne, strategist at Société Générale, says latest activity data have been reassuring, indicating that any slowdown in Russian growth will be modest this year, with activity well supported by consumer demand.

Industrial production grew by 3.8% on an annual basis in January, while retail sales rose by 6.8%.

Anne says this should encourage the Central Bank of Russia to maintain its tight liquidity stance, which should help support the rouble.

He adds that falling political tensions within Russia – thousands took to the street to demonstrate against election results that saw prime minister Vladimir Putin’s party win a majority in the country’s parliament – could also help lift the rouble.

“While the political agenda is going to be heavy in the weeks ahead, one could argue that the political risks now appear to be declining, especially in view of the momentum loss on the part of the street protesters,” says Anne.

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