Ruble strengthens on improvement in Russian economy

The deadlock in Brexit talks and the ECB president Mario Draghi’s dovish stance on tapering of monetary stimulus has kept the Euro weak since August.

On the contrary, the range bound movement of crude oil, between $45 and $50 per barrel, is assisting a recovery in the Russian economy.

Since August 1, the EUR/RUB has lost about 400 pips to trade at 67.60 levels. Still, we expect a deeper decline in the EUR/RUB pair due to reasons given below.

During a Foreign Investment Advisory Council meeting held by Russian Prime Minister Dmitry Medvedev, the Russian Economic Development Minister Maksim Oreshkin pointed out that the volume of foreign direct investment has more than doubled to $14 billion in the first half of 2017, compared with the similar period of 2016. Medvedev said the foreign companies have invested more than $165 billion since the formation of the Council in 1994. Further, the prime minister revealed that more than 20 investment projects, highest in Russian history, ranging from energy to digital economy, are currently implemented in different economic areas.

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The Economic Development Ministry of Russia also stated that it expects the country to register labor productivity growth of 2.3% in 2018, 2.4% in 2019, and 2.6% in 2020. Correspondingly, the unemployment rate is also expected to decline to 4.7% by 2020. In the Eurozone, the inflation rate remained steady at 1.5% in September, according to a data published by Eurostat on Tuesday. Even though the inflation rate is in line with analysts’ estimates, the ECB will be concerned by the lack of increase in inflationary pressure. Notably, last month, the ECB President Draghi had expressed his concern about the negative impact of the strong Euro on the fragile economic recovery in the Eurozone.

Later on Tuesday, the ZEW Centre for Economic Research reported a sharp decline in the index of Eurozone economic sentiment to 26.7 in October, from 31.7 a month earlier. Economists had forecast a reading of 34.2. The index of Current Conditions fell marginally to 87, from 87.9 in September, and missed analysts estimate of 89. Thus, fundamentals support a further decline of the EUR/RUB pair.

The EUR/RUB pair is forming a descending triangle pattern as shown in the image below. Further, the negative reading of the MACD histogram confirms bearishness in the counter. Thus, we expect the EUR/RUB pair to break below the minor support level of 66.20 in the short-term and major support level of 63.90 in the medium-term.

We may create a short position in the EUR/RUB pair to profit from the downtrend. If we decide to do so, the trade will be established near 67.60, with a stop loss order above 68.80. The profit will be booked near 66.20.

Further, we may also park our surplus funds on a put option contract. In order to do so, the contract should remain active at least until October 26 and the currency pair should be trading near 67.60.