Russian rouble loses more ground, breaching trading band

16/10/2014 08:26 AST

MOSCOW: Russia's rouble struck a new all-time low against the dollar on Wednesday and again breached the limits of its trading band, as traders said the bill for the central bank's defence of the currency this month has exceeded $10 billion.

The rouble has been under pressure for months due to broad risk aversion towards Russian assets because of the country's role in the Ukraine crisis and Western sanctions which have starved Russian firms of foreign currency.

That pressure has gathered momentum since the start of October as oil prices have endured an unrelenting rout, with Brent crude futures slipping more than 10 percent in the past two weeks to multi-year lows.

"The recent rouble weakening has been a re-adjustment to weaker fundamentals - lower oil prices - so the rouble outlook now fully depends on the scale of extra oil decline, if it continues," Dmitry Polevoy, chief economist for Russia and CIS at ING Bank in Moscow, said in a note.

Russia receives up to half of its federal budget revenues from sales of oil and gas, and a $1 fall in the price of oil costs Russia's federal budget around $1.7 billion.

By 0900 GMT, the rouble was 0.25 percent weaker against the dollar at 41.02 after sinking beyond 41 roubles per dollar for the first time. It was 0.15 percent weaker at 51.91 versus the euro.

That left the currency down 0.2 percent at 45.92 against the dollar-euro basket the central bank uses to gauge the rouble's nominal exchange rate. That was 22 kopecks beyond the upper limits of the trading band the central bank had set for the rouble on Tuesday, when it shifted the band by 35 kopecks.

The bank automatically intervenes to defend the rouble once it breaches its trading band and shifts the band by 5 kopecks after spending $350 million in forex interventions. The bank says it has spent close to $7 billion in interventions between Oct 2 and 13 but releases such data with a lag of two days and traders said the most recent shifts in the trading band had pushed interventions over $10 billion.

"The rouble will probably continue to lose ground at a moderate speed," analysts at Bank Zenit in Moscow said. "Given internal problems and a discount due to geopolitical considerations, the Russian currency could weaken quicker than its emerging market peers," the note read.

SMOOTHING VOLATILITY

Russia's finance minister said on Wednesday that his ministry planned to start foreign exchange deposit auctions within a month to smooth rouble volatility.

"Given the scale of the market stress, the MinFin deposits alone won't be able to cure the FX market, especially if the rouble continues falling further and stimulating rising demand from households," said Polevoy at ING Bank, who estimated the size of the deposits at around $5.7 billion.

In another move aimed at easing a shortage of foreign currency among Russian firms shut out of international capital markets, the central bank plans to launch seven- and 28-day foreign currency repos by the end of the month.

Russian shares also turned lower on Wednesday, wiping out strong gains in the previous session on hopes for some respite in tensions over Ukraine after President Vladimir Putin ordered to withdraw some troops from near the Ukraine border.

The dollar-denominated RTS index was down 1.4 percent to 1,060 points, while its rouble-based peer MICEX traded 1 percent lower at 1,380 points. Among Russia's blue chips, top bank Sberbank was down 1.7 percent and oil producer Rosneft fell 1.1 percent.

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