Russian rouble weakens as market eyes a possible deeper rate cut

Credit: REUTERS/SERGEI KARPUKHIN

The Russian rouble weakened on Wednesday, hurt by growing risk aversion amid a U.S.-China trade conflict and Britain's exit from the European Union, ignoring potential gains from government bond auctions.

Adds Goldman Sachs note, bond auction result, updates prices

MOSCOW, Oct 23 (Reuters) - The Russian rouble weakened on Wednesday, hurt by growing risk aversion amid a U.S.-China trade conflict and Britain's exit from the European Union, ignoring potential gains from government bond auctions.

The rouble was 0.3% weaker against the dollar on the day at 63.92RUBUTSTN=MCX, falling from Tuesday's 12-week high of 63.56, and had lost 0.3% to trade at 71.20 versus the euro EURRUBTN=MCX.

Wednesday's auction of rouble-denominated OFZ bonds by the finance ministry saw strong demand of 79.6 billion roubles ($1.25 billion) for its 11-year bond.

The demand offered little help to the rouble, however, before Friday's interest rate decision, when the central bank has signalled it will cut its key rate from 7.0%.

The prospect of a rate cut fuelled demand for Russia's sovereign debt before the central bank's actual move later this week. Yields on 10-year OFZ treasury bonds, which move inversely to the price, dipped to 6.45% on Wednesday, their lowest since May 2013. RU10YT=RR

But lower rates reduce make the rouble less attractive for carry-trade speculation, where traders exploit the difference in interest rates compared with other currencies for cheap funding.

Analysts polled by Reuters on average forecast a 25-basis-point cut this Friday . Some are braced for a cut to 6.5%.

Russia's largest and second-largest lenders, Sberbank and VTB Bank, along with Goldman Sachs, believe a 50-basis-point cut is on the cards.

"In light of recent statements by the Central Bank of Russia's leadership and the persistent weakness of inflation, we forecast a 50-basis-point cut on Friday and at the following meeting in December, superseding our previous forecast of four 25-basis-point cuts in the next meetings," Goldman Sachs said in a note.

"I think we can expect a reduction in the key rate," said VTB Bank CEO Andrey Kostin. "I know Sberbank is forecasting it will be 6% before the end of the year. I think this is quite realistic."

Brent crude oil LCOc1, a global benchmark for Russia's main export, was down 0.8% at $59.2 a barrel.

Russian stock indexes were down on the day. The dollar-denominated RTS index .IRTS was down 0.5% to 1,380.5 points. The rouble-based MOEX Russian index .IMOEX was steady at 2,801.0 points.

For Russian equities guide see RU/EQUITY

For Russian treasury bonds see 0#RUTSY=MM

($1 = 63.9110 roubles)

(Reporting by Alexander Marrow; additional reporting by Andrey Ostroukh; editing by Larry King)

((alexander.marrow@thomsonreuters.com; +7 495 775 1242;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Reuters

Reuters, the news and media division of Thomson Reuters, is the world’s largest international multimedia news provider reaching more than one billion people every day. Reuters provides trusted business, financial, national, and international news to professionals via Thomson Reuters desktops, the world's media organizations, and directly to consumers at Reuters.com and via Reuters TV.

Learn More