Why is ruble going strong?

Why is ruble going strong?

The dollar exchange rate declined below 65 rubles during trading on the Moscow stock exchange last week, while the euro exchange rate dropped below 74 rubles.

This week the dollar fluctuated near 64.5 rubles on Monday-Wednesday, having gone down sharply to 63.65 rubles yesterday; the euro exchange rate dropped below 73 rubles on Monday, reaching 72.86 rubles yesterday.

This morning, the strengthening of the ruble continued, the Russian currency is now trading at 63.74 rubles per dollar and 72.72 rubles per euro.

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking to Vestnik Kavkaza, noted that ruble appreciation is temporary and linked to the fast that the U.S. Fed kept the base interest rate. "Many feared that the Fed's rate hike would mean that money would flow to the U.S. from emerging markets. But it was decided not to raise the rate, and therefore the money are returning back to emerging markets. Therefore, the ruble exchange rate is strengthening. For the same reason the oil price has increased as well. That is, all the assets of developing countries have started growing for this reason," he pointed out.

"In general, since the Fed refuses to raise the rate, the dollar is likely to weaken for a while. But this is a short-term factor. The main problem of the ruble has not gone away - the Ministry of Finance still needs to buy foreign currency in the foreign exchange market, and if these purchases are increase, the ruble exchange rate will begin to weaken again. According to the Ministry of Economic Development's recent forecasts, the ruble exchange rate will be weakened for the next couple of years," Alexander Abramov pointed out.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA, former deputy chairman of the Central Bank of Russia Konstantin Korischenko, agreed with Abramov. "It was expected by many: on the one hand, oil prices are stabilizing, on the other hand, there is some reassurance on the sanctions issue, and the third thing, which is probably the most important, the Fed and the European Union outlined they have no intention to tighten financial policies. The Fed, in fact, reported that it stops rate cuts by the end of the year and stops quantitative tightening. This, in turn, made the Russian ruble a more attractive currency for investment," he explained.

The situation, however, may change already tomorrow, when the next meeting of the Board of Directors of the Russian Central Bank will be held. "We'll see whether the Russian Central Bank announces a change in the interest rate on Friday. Most likely, the rate will be kept at 7.75% per annum. In this case the market will expect a further rate cut at the next meetings of the Bank’s Board of Directors - which, in turn, will mean that the ruble will continue strengthening," Konstantin Korishchenko concluded.