The floating rouble
The Central Bank of Russia may be caught between an FX rock and reserves hard place.
In an effort to inject more two-way price action into the RUB, the CBR has shifted to surprise FX intervention and ditched the trading band.
They have cancelled the floating RUB that sparked intervention when either side of the corridor was tested toward and will now step in at any moment and with sufficient volume to cut speculation.
How the CBR conducts intervention will be interesting as RUB weakness is not due to excessive speculation, but instead lower oil prices and restricted access to international capital markets – both factors that remain in play. While the CBR will be helping to mop up excess RUB supply, the risk still tilts towards it using up valuable FX reserves in the process.
The next step would be for the CBR to meet some of this demand directly, especially the expected pick-up in corporate demand for USDs during December. Meeting this demand through an illiquid market would damage its credibility. So the CBR will have to find ways to supply this FX demand, either directly or indirectly, while cognisant of rapidly depleting valuable FX reserves.
While overall reserves still top US$400 billion, a fall to dangerously low levels could be even more damaging to RUB sentiment. As long as access to international capital markets remains limited and oil prices are falling, CBR actions are only going to provide temporary RUB support at best.
The RUB weakness remains at risk of overshooting.