On 22 January the Russian Central Bank moved to devalue the rouble again, but this time to introduce a new wider band against its basket, which is made up of 45% of the euro/rouble rate and 55% of the dollar/rouble. Sergei Ignatiev, head of the Russian Central Bank, said the new floor of Rbs41 will be stoutly defended, unless oil falls to $30 dollars a barrel. That resolve is now being tested, with the Russian currency trading at Rbs40.95. Against the dollar the currency has fallen to Rbs37. The bank raised its refinancing rate early last week to 13%.
The new move down occurred as Russia saw widespread demonstrations against the government, which pointed to the growing strains produced by weak commodity prices. Last Wednesday, ratings agency Fitch echoed an earlier move by S&P and downgraded Russia’s foreign debt status to BBB from BBB+.
Russia has spent around $200 billion, a third of its reserves, propping up its currency since the summer, and the loss cannot go on indefinitely. Deputy prime minister Shuvalov said growth would ‘deliberately’ be allowed to fall to near or below zero in 2009 to stabilise the economy and maintain reserves. He also indicated future government efforts would focus on propping up the banking system, rather than loans to industrial groups.
Kazakhstan is devaluing the tenge by 18% in response to low oil prices and the weak rouble and Ukraine is slipping in its efforts to carry out the reform package demanded by the IMF in return for its $16.5 billion bail-out. In a related flight from risk, the Central European currencies are also under the cosh with the forint pushing through HUF300 to the euro and the zloty falling to PLZ 4.65.
Shares says: The rouble floor will be broken. If you want to invest in Russian equities, wait.
US debt weighs on dollar
The question remains: who will pick up Washington’s tab?
Ian McDiarmid
In January Shares recommended going long of the pound against the dollar. That trade has yet to work, but should be maintained, with the pound still hovering around $1.45.
Last week the US Treasury announced its quarterly refunding programme. This was not new, and Britain’s deteriorating public finances are not good, but it highlights the looming deluge of US paper. The Treasury will sell $67 billion this week – its largest-ever quarterly refunding – and it said it may have to start monthly sales of all its benchmark maturities.
One indication of how jaded the appetite for treasuries may become was the US Treasury’s announcement that at the end of this month it will start selling seven-year bonds for the first time since 1993, and at a frequency of once a month. The Treasury has warned it could need to sell between $1,500 and $2,500 billion this year, and the question of who will buy this debt is especially pertinent with foreigners holding over half of outstanding US debt.
Shares says: Buy the pound at $1.46.
Kiwi to run against pound
Simon Griffin
Sterling’s recent upward surge against the New Zealand dollar looks overdone and susceptible to a correction in the near term. Rotation back down to test support at NZ$2.6225 is favoured, for a sharp 6% rally in the kiwi. The kiwi has been sinking against sterling at an alarming rate since the turn of the year. December saw the NZ dollar all but retest its strongest levels at NZ$2.4290, but it has since lost 15% of its value against the pound in just five weeks.
The pound reached NZ$2.8620 – the high seen last October and the start of a zone of congestive resistance that extends to NZ$2.9040. If sterling continues to firm through this zone then the next logical target would be a test of NZ$2.9700. Ultimately, sterling bulls would favour a retest of the triple top, seen in the summer of 2006, that could produce a move to NZ$3.0500.
Yet the pound’s run looks overdone and following the expected pullback I would not be surprised to see this cross-rate range trade between NZ$2.86 and NZ$2.62. This could prove highly lucrative for those traders who cotton on quick, provided a stop-and-reverse strategy is adopted just outside the boundary levels to guard against breakouts.
Shares says: Sell the pound against the kiwi.
Aussie outlook altered
Ian McDiarmid
The Australian dollar rebounded from ten-week lows against the greenback after the Reserve Bank of Australia (RBA), did what was expected and cut rates by 100 basis points. The cut, the fifth in six months, saw rates fall to 3.25% but crucially the RBA indicated any further reductions would be smaller and more gradual – news which means traders should take out a long on the Aussie.
The currency was further boosted by the announcement of a new fiscal stimulus package of A$42 billion, which comes on top of last year’s initial A$10.4 billion boost. Though Australia’s budget will move into deficit it is predicted to be around only 3% of GDP in the coming fiscal year. The treasury hopes the package will allow the economy to grow 1% this fiscal year and 0.75% next year.
December’s trade surplus narrowed more than forecast to A$589 million as coal and metal exports slumped. The sluggishness in commodities is a prime reason why the consensus is still bearish on the currency.
Currency movements are currently highly correlated to stock markets, with sell-offs giving the greenback a bid. The VIX (Chicago Board Options Exchange Volatility Index) has been making higher lows and lower highs on the S&P 500 indicating volatility is falling, and that the flight to safety bid will be weakened. Commodities will also bounce if the markets recover, which would benefit a commodity-based currency such as the Aussie. In the meantime a slower pace of cuts could aid the carry trade. The low of $0.613 at the end of October looks like it may prove to be a bottom.
Shares says: On the back of slowing cuts buy the Australian dollar at $0.6400.
