USD/RUB: Ruble sits and waits for Russia’s rate hike

The USD/RUB exchange rate has moved sideways this week as investors wait for the upcoming Bank of Russia (BoR) interest rate decision and the US personal consumption expenditure (PCE) report. It has dropped by over 14.4% from its highest point in 2023.

Russian ruble has done well

The Russian ruble has done well this year, helped by the resilient performance of crude oil prices. While Brent and the West Texas Intermediate (WTI) benchmarks have dropped recently, they have constantly remained above $75 this year.

Russia benefits from oil prices because it is the third-biggest producer in the world after the US and Saudi Arabia. It is the biggest source of cash for the Russian government. 

While Western countries have sanctioned Russia and placed a price cap, the country has continued to sell its oil mostly to Asian countries. Recent data shows that exports to China increased by 5% in the first half of the year.

Additional numbers revealed that oil and gas revenue rose by 50% in June compared to the same period in 2021. These data show that Russia has engineered a strong response to the US and European countries, 

Meanwhile, more economic numbers show that the economy is doing modestly well, helped by increased defense spending. As a result, the unemployment rate has remained below 3%, intensifying a labor shortage. 

The biggest challenge that the Russian economy faces is that the country’s consumer inflation has continued rising, helped by robust spending. The headline Consumer Price Index (CPI) rose to 8.6% in June from 8.3% in the previous month. Inflation has jumped from last year’s low of 2.3%.

Bank of Russia rate hike

Therefore, a booming economy and high inflation rate mean that the Bank of Russia (BoR) will likely deliver a big hike this week. Economists expect the bank will increase interest rates from 16%, where they have remained since December to 18%. The 200 basis point increase will be the biggest one in months. 

A rate hike will be a divergence from what other central banks are doing. The European Central Bank (ECB) has already delivered its first interest rate cut and analysts expect it to cut several times this year. 

The Swiss National Bank (SNB) has slashed rates two times while Riksbank has also cut one time. Central banks in emerging market countries like Brazil, Mexico, and Chile have all slashed their benchmark rates. 

The Russian central bank has also placed other measures to support the ruble. For example, it has placed strict currency controls to reduce the use of the US dollar and the euro in the economy. 

In June, the central bank halted trading in the two currencies at the Moscow Exchange (MOEX). It has also extended restrictions on foreign currency withdrawals until September this year. 

This means that it is almost impossible for Russians to open new foreign currency accounts in banks. Also, withdrawals are mostly handled in Russian rubles. Russia hopes that these measures will help it reduce the role of the ‘toxic’ dollar in the economy.

US PCE data ahead

The USD/RUB exchange rate has also dropped as investors focus on the actions of the Federal Reserve. The dollar index has dropped recently after the Federal Reserve hinted that it will start cutting interest rates before inflation drops to 2%.

Recent economic numbers have been encouraging to the Fed as they have shown that inflation is falling steadily while the unemployment rate is rising. The jobless rate has risen to 4.1%, its highest point since 2021. 

Recent data also showed that the headline and core Consumer Price Index (CPI) dropped to 3.0% and 3.2%, respectively. Economists also expect Friday’s Personal Consumption Expenditure (PCE) data dropped slightly in June. 

Therefore, recent swap market data show that traders expect the Fed to deliver three cuts this year since the economy is slowing. In a note, a Bloomberg analyst said:

USD/RUB technical analysis

The daily chart reveals that the USD/RUB exchange rate peaked at 102.52 last year and has now dropped to 86. This performance has happened in a low-volume environment as demand and supply for the rubles in the international markets has crashed.

The pair has remained below the descending trendline that connects the highest swings since October last year. It has remained below the 50-day moving average and is slightly above the key support level at 86.62, its lowest point in February.

Therefore, the USD to RUB exchange rate will likely remain in this range this week as investors focus on the US PCE data and the Bank of Russia interest rate decision.