Although the Russian Ruble has managed to stage a terrific rebound on over the last few months in light of rising energy prices which have seen crude oil stabilize near the $50.00 per barrel threshold, the economy remains in tatters. Business investment continues to struggle in the nation as borrowing costs remain significantly elevated. While the dramatic moves by the Russian Central Bank have quelled a degree of panic and helped to contain high inflation, the broader economy has not felt any sense of recovery with the economy continuing to contract. Not helping matters is a 6-month extension of European sanctions that were enacted following the annexation of Crimea. As such, the Ruble’s recent gains continue to mask the true state of economic conditions in the nation as political and economic alienation take their toll.

Energy Gains Mirrored By Ruble

One of the biggest forms of relief for the Central Bank of Russia has been the rapid appreciation in the Ruble that was fomented in part by the rebound in oil prices. After hitting lows earlier in the year which were matched in large part by record highs in the USDRUB pair, crude oil has steadily been climbing amid multiple supply disruptions across the globe and falling production in certain regions. For its part, Russia has now exceeded Saudi Arabia as the world’s largest crude oil exporter. However, considering no deal to put in place an output freeze was agreed upon between major producers during the last round of negotiations in Doha, conditions that drove oil prices lower could quickly reemerge. Expectations of falling demand from China could see resurgent oversupply become a real threat to recent Ruble gains.

While there is no immediate risk of the United States raising interest rates which would see the US dollar experience additional appreciation, the news is not all good for the Russian Ruble. For one, despite stabilizing the currency after spending a tremendous amount of foreign currency reserves to prevent a Ruble collapse, interest rates in Russia now stand at 10.50%, a level that is particularly challenging for businesses trying to borrow funds. If the rate should fall, easing monetary policy will be a net negative for the Ruble. Moreover, high rates have contributed to falling business confidence and construction which has contracted at a -9.00% annualized pace according to the latest figures. Although broader economic metrics like unemployment has improved to 5.70% alongside expanding industrial and manufacturing production, a full blown recovery in economic activity is not currently forecast before 2017.

One of the main reasons that an economic revival has remained elusive has been the ongoing sanctions imposed by Western governments in response to unilateral actions taken in Ukraine. Even though not all European governments are in agreement with the measures, the latest European Union decision to extend sanction through January 31st of 2017 has not helped reduce tensions. Moreover, it means that inflation could remain above the Central Bank’s 4.00% target for a prolonged period of time. This is what causes the most amount of pain for the average Russian citizen and is further exacerbated when the local currency drops, making imports significantly more expensive. Should oil prices once again plunge, creating a host of problems for the Central Bank to tackle, the Ruble could once again be set for a dramatic decline.

Technically Speaking

Due to Russia’s overwhelming reliance on energy prices, the USDRUB pair has historically had a very strong inverse correlation with changes in crude oil. Although significantly lower than previous periods throughout 2016, currently standing at -0.3638 on a 1-day candlestick chart, one a 1-week candlestick chart it holders truer, printing at -0.8400. This means that any substantial drop-off in crude oil prices should the supply imbalance reappear could readily see the move echoed by a rally in the pair. However, while the longer-term bias for USD/RUB remains to the upside considering the fundamental backdrop for each respective currency, near-term the Ruble might have further room to appreciate based on other technical indicators, helping drive the pair lower.

For one, an equidistant channel lower than has been intact since the middle of March has a bearish bias with ideal positions established near the upper channel line targeting the lower channel line. However, any move above the upper channel line would be considered a channel-based breakout to be accompanied by renewed upwards momentum. Outside of the channel, which has a downward bias, are both the 50 and 200-day moving averages. The 50-DMA crossing the 200-DMA to the downside back in early May could be viewed as a bearish crossover. While not a “death cross” formation, it still is modestly bearish, with both moving averages acting as resistance against any rebound in the interim. Nevertheless, based on recent price-action, the 50-DMA is not acting as a solid level, meaning eyes should be trained on the 200-DMA as more relevant in terms of importance.

Looking Ahead

With oil prices continuing to show above average levels of intraday volatility amid a multitude of potential supply-side shocks, the Ruble will continue to exhibit large swings versus the US dollar. Even though the Ruble has staged a noteworthy comeback, this was largely the result of external conditions as domestic conditions remain troublesome. The sanctions extension combined with high interest rates will create a challenging environment for domestic businesses to succeed with any drop in oil prices creating ideal circumstances for inflation to climb. Taking these sides into consideration, it is clear that despite the near-term ability for the Ruble to continue its appreciate, on a more medium-term basis, the stage is set for gains in USDRUB if oil prices cannot hold fast at their current floor. With the number of risk factors increasing, the outlook for the Ruble appears increasing bearish.