The Russian ruble, which has moved higher by nearly 9% since late May, might be due for a bout of mean reversion, a Deutsche Bank report notes. With geopolitical risks afoot, the bank is advising clients to sell positions they might have established in late May in a Russian Ruble short position when the currency modeling pointed to an overvalued situation.
After post election trend higher, Russian Ruble Short was good play on valuation
In late May, Deutsche Bank currency analysts Gautam Kalani and Chief Economist Elina Ribakova looked at the Russian ruble on a trade-weighted basis, considering a number of valuation models, such as DBeer, Purchasing Power Parity (PPP), Fundamental Equilibrium Exchange Rate (FEER) currency valuation models which consider inflation, trade and productivity data, among other data points. From this analysis they estimated the ruble to be near 10% overvalued.
The ruble had come off a post-election high on November 15 of 66.14 to sink all the way to 55.77 by late April, which appeared to be an overshoot to land in overvalued territory.
In the past, when the currency had reached near the 10% overvalued level, such a metric served as a resistance point to the price and a reversion occurred, which happened most recently.
While the ruble was one of the most expensive currencies in the world based on fundamental valuation models, it has erased much of that valuation excitement and now is middle of the pack.
Political tensions and long covering no longer primary issues for Russian Ruble Short thesis
In addition to looking at traditional fundamental currency analysis, which generally evaluate the same inputs across all sovereign regions, Kalani and Ribakova consider what is unique to the Russian economy, namely oil, to provide a local flavor to valuation metrics.
While the spot price for the ruble was under fair value from March, that relative value analysis is now showing a meeting of the minds and has flattened out.
In addition to mathematical valuation metrics, there is the more difficult to quantify economic rhetoric coming from Russian economic officials. While both the economics and finance ministers had been talking down the ruble, saying it was too strong, those comments seem to have subsided in the wake of nearly a 10% correction in a little over 2 months.
When Deutsche Bank suggested their Russian Ruble short, speculative positioning in the currency was significantly long in the wake of the post-election price trend. A key premise for suggesting the Russian Ruble short was on the basis the market was significantly long. Often times, a move higher can trigger long covering which aids the short position. This speculative long positioning has now receded, leaving less ammunition to propel the currency lower through long covering.
But that is just one of several issues.
Geopolitical tensions between Russia and the US have been at a fever pitch in 2017. Not only is the FBI’s investigation of Russian ties into the Trump campaign intensifying, but when Russian President Vladimir Putin announced his decision to expel US diplomats July 30, it only ratcheted up tensions. But now, looking at the geopolitical panoply, those tensions could be mitigated, with the US more focused on North Korea and in need of regional friendships from China and Russia rather than opening up a multi-front disagreement.
“Going forward, we expect a lull until the US treasury reports to Congress on the effects of extending sanctions to sovereign debt and the full range of derivative products,” Deutsche Bank noted. “The report is to be prepared by the US treasury in consultation with the Director of National Intelligence and the Secretary of State within 180 days after the date of the enactment of the US sanctions bill.”
All these fundamental concerns point to reasons to abandon the successful ruble short, but there is also a more technical reason. “the last two times USDRUB spiked to current levels on geopolitical/external risks, the move reversed relatively quickly,” the report stated, pointing to mean reversion. “Therefore, we view the current geo-political risk-related spike as providing a good opportunity to exit our USDRUB longs.”