The Russian rouble crisis has set off spectacular moves in currency markets and paved the way for a fresh four-year low for the Australian dollar as the rout in commodity prices proves unrelenting.
In moves that will be greeted with relief at the Reserve Bank of Australia, the local currency fell below US82¢ to touch US81.66¢, its lowest level since June 2010, putting a US70¢-handle in sight before the end of this year. Australian 10-year bonds rallied, causing yields to fall to the lowest level since July 2012 at around 2.8 per cent.
The Russian currency has fallen around 15 per cent this week, defying an emergency rate hike from Russia’s central bank which raised interest rates to 17 per cent from 10.5 per cent. That failed to stabilise the rouble and the losses continued in trading on Tuesday night bringing emerging markets and commodity currencies down too.
The foreign exchange crisis in Russia follows a collapse in energy prices, hurting energy exporters which are refusing to cut their output to arrest the plunge. Oil is hovering around five-year lows, extending this year’s slide to more than 40 per cent. Other commodities were pummelled too including iron ore, down to $US68.58.
Stephen Halmarick, Colonial First State Global Asset Management’s head of investment markets research, said the turn in Russia’s economic fortunes highlight the risks to the global economy in 2015.
“These big moves in markets can have flow-on effects across the world. If you’re an energy exporter you’re going to face a much more difficult time in 2015. If you’re an energy importer your outlook is brighter,” he said. “The Russian economy was in a pretty fragile state before the oil price started falling given the sanctions. On top of that you’ve got a major collapse in their major commodity export.”
Mr Halmarick agreed there was no doubt the RBA would be encouraged by the weakness in the Australian dollar but it may end up negating the need for further easing next year. “As the RBA’s pointed out before, interest rates are actually declining. You’d have to imagine there’s another round of reductions in fixed rate lending coming,” he added.
Martin Whetton, ANZ’s senior rates strategist, predicted Australian commonwealth government bonds yields were headed towards 2 per cent. His bullish conviction was sealed by the events of the past few weeks including the commodity price rout, fragile emerging markets economies and investor flows. “If you have a risk-off event where [emerging markets] and high-yield and equities get torched because the Fed raises rates, well people go and buy bonds.”
He questioned the consensus view that Australian bond yields should go higher as global growth advances. Australian bonds were still in effect “the highest nail in the floorboard” because of their compelling yield relative to US and European bonds.
“The risk to investors is the melt-up,” Mr Whetton said, referring to investor positions.
Raiko Shareef, a currency strategist at National Australia Bank-owned BNZ in Wellington said the consequences of the rouble’s plunge would probably extend into next year. “The first order and probably the short term impact is on risk sentiment and investor sentiment, that will feed through as a mild negative on the Aussie dollar, risk sentiment being negative for equities and risk currencies such as Aussie and Kiwi.”
A further positive for the Australian economy was that the value of the local currency has declined on a trade-weighted basis too, previously the relief was limited to its US dollar value.
The benchmark S&P/ASX 200 Index advanced on Wednesday, shrugging off the turmoil in fixed income and currencies. Equities added 0.2 per cent to 5161.9 points.
Mr Shareef said Russia’s response would be a subject of interest and investors will be occupied with “more geopolitical concerns about what Russia’s political leaders do now that their backs are against the wall”.
“Clearly some pretty desperate measures are needed to stem the rouble’s slide. Those are probably going to play out in 2015 rather than the near term,” he added.
The situation might influence volatility too, but the currency strategist observed that the energy price shock was a more dominant force in shaping volatility levels.
“Whippy price action is already happening and maybe some of it is due to the situation in Russia and just investor concern at the moment. More broadly it’s probably due to the plunge in the oil price, people are unsure as to where that bottoms out.”
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