Inflation and Interest Rates
On October 6th, Russia released it’s September inflation report which showed an increase of 7.4% YoY vs and estimate of 7.1% YoY and August’s print of 6.7% YoY. It was the highest level since June 2016. 16 days later, the Central Bank of Russia tried to put a halt to rising inflation by increasing interest rates 75bps to 7.5%. Expectations were an increase of only 50 bps.
Crude Oil and OPEC+
Russia is one of the world’s leaders in energy exports. Therefore, as the price of oil and gas increases, so does the value of the Ruble. Given the energy supply crunch many European countries are facing headed into the colder months, Russia’s Gazprom has been instructed to increase gas supply to fill EU storages. More supply should equal lower price. In addition, OPEC+ meets on November 4th. For the moment, oil prices have leveled off between $80 and $85. US President Biden has asked OPEC to increase output to reduce prices. Will current high prices and Biden’s request be enough for OPEC to increase output? This would increase the supply, thus lowering the price (and theoretically lowering the price of the Ruble.)
Meanwhile, coronavirus cases are on the rise in Russia, as new daily cases and deaths increased to all-time highs. Putin has ordered a nonworking week from October 30th to November 7th. In addition, schools and restaurants will be closed (except for takeout). This could lead to a potential slowdown in both growth and inflation. Russia releases October’s Inflation Rate on Wednesday. Expectations are for 7.2%, lower than September’s 7.4%. This data point will not include the week-long shutdown. The Bank of Russia doesn’t meet again until December 17th; therefore, they will have both October’s and November’s inflation prints (which will include the week-long shutdown) before they decide if they will raise rates.
USD/RUB broke lower from a long-term symmetrical on May 6th at 74.70 and range-traded between 71.50 and 73.80 until October 15th. The pair broke below the range but came to a halt at the 61.8% Fibonacci retracement level from the lows of Jan 20, 2020 to the highs of March 18th, 2020, near 69.28. Horizontal support is just below dating back to June 2020, at 68.035. Bulls will be looking to buy within this range. Horizontal resistance is at 71.55, followed by a downward sloping trendline dating back to April 6th near 73.00, and then the 200 Day Moving Average at 73.79. USD/RUB is highly negatively correlated with Crude Oil. The current correlation coefficient is -0.93. A reading below -0.80 indicates a strong, negative correlation. (A reading of -1.00 is a perfect negative correlation). Therefore, if crude were to pull back, one would expect USD/RUB to move higher, and vice-versa.
USD/RUB has been moving lower, however, the pair bounced off strong support at the 61.8% Fibonacci retracement from the January 2020 lows to the March 2020 highs. If inflation comes in weaker from Russia next week, the pair could continue higher. Also, don’t forget about the OPEC+ meeting next week. As the USD/RUB has a high inverse correlation with oil, if OPEC+ decides to increase output, then value of crude oil should fall, and the price of USD/RUB should increase on the daily timeframe!