Pound-Sterling Eyes 90.00 vs. Rouble for First Time in 2018 as Market Storm Intensifies

- GBP/RUB surges to over 90.00 as trade sanctions hammer Rouble

- Tensions with Russia ramp up after reports of Syrian chemical weapon attack

- This could be tip of the iceberg, says one analyst 

© Goroden Kkoff, Adobe Stock

The Rouble depreciated heavily on Tuesday after US trade sanctions rocked Russian financial markets. 

The Pound-to-Rouble rate traded above the 90.00 level for the first time since June 2016 after panic selling following the imposition of US sanctions on a Russian businesses owned by an inner-circle of Russian oligarch's close to Vladimir Putin.

On Tuesday the currency plummeted by 5.0%, with one Pound buying 89.95 roubles at the time of writing, following an equally torrid decline on Monday.

Investors started pulling out of Russia on masse after the announcement of US sanctions targeting specific companies owned by oligarchs close to Vladimir Putin, in particular, Aluminium producer Rusal and energy giant EN+. The sanctions essentially outlawed US citizens from doing business or owning shares in those companies and sparked a sell-off.

Although only a sample of Russian companies were targeted the sanctions sparked a wider rout of selling which spread to other Russian shares, leading to an 11.4% drop in the Russian stock market on Monday and further 3.5% on Tuesday. The blood-letting spread to other markets too, including the credit markets with foreign investors panic-selling their Russian holdings and pulling out of the country.

The news of the resignation of commodity giant Glencore's boss Ivan Glasenberg from the board of one of the targeted Russian companies Rusal on Tuesday was a further blow to market sentiment.

At the weekend President Donald Trump criticised Vladimir Putin, his Russian counterpart, for his support of the Syrian government, which was accused of launching a chemical weapons attack in eastern Ghouta.

But the sanctions are in response to other violations which Russia is accused of perpetrating too, including "interference with US elections, cyber-attacks, violence in Ukraine and Syria (and more broadly for attempts to undermine western democracies)," said Thu Lan Nguyen, an analyst at Commerzbank. 

The geopolitical storm which has whipped up, and the seriousness with which president Trump is taking the Syria chemical attack, was reflected in the news that the President had decided to cancel his trip to the Summit of the Americas in Lima this week, in order to 'coordinate America's response to the violence in Syria'.

Meanwhile in Moscow, the governor of the Rusian central bank (CBR), Elvira Nabiullina, said the news of the sanctions on Friday had caused a “market correction”.

“As usually happens in those cases, in the first days we see increased volatility, because there is a lot of uncertainty, investors and market players don’t quite understand the consequences and how far they go, they’re still working it out,” she said.

Despite analysts suggesting the CBR would step in to prop up the Rouble by selling its FX reserves, Ms. Nabiullina maintained the opposite, that the central bank would not stem the Rouble’s slide, however, it is rare for central bankers to openly admit interference in currency markets, which is viewed dimly on the world stage.

"If the sell-off continues to accelerate and the rouble significantly decouples from economic fundamentals and oil prices, the CBR may consider selling hard currencies to slow down the pace of its depreciation," says Piotr Matys EM FX Strategist at Rabobank.

Though the current Rouble depreciation is steep it may just be the tip of the iceberg, warns Commerzbank's Thu Lan Nguyen, who notes how after the original Ukraine sanctions were imposed, USD/RUB rose by a staggering 87% between July 2014 and January 2015.

"Compared to that, this 4%-5% move represents only moderate uncertainty so far," says the analyst.

Whereas during the Ukraine sanctions there was a question mark over whether the CBR would step in to support the Rouble there is no question it will this time round, argues Thu Lang Nguyen.

"The one uncertainty that has been eliminated since the last cycle is the question of whether or not CBR will defend the currency – it absolutely will – and this realisation is likely to limit the fallout for the RUB, even if geopolitical tensions were to further escalate," he says.

Rabobank's Matys also expects the CBR to pause its monetary policy easing cycle in response the crisis, to maintain an attractive interest rate differential.

Whilst the Rouble was stretched to the downside Matys did not see a risk of a reversal yet - not until the geopolitical storm had blown over.

"Momentum indicators are stretched and we may see a corrective pullback. But, scope for a retracement...is likely to prove limited due to concerns that more Russian companies could become a target of US sanctions," added the analyst.

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