Forex Investment and Currency Trading

High commodity prices still provide strong support for the economy. Official GDP forecasts have been raised, consistent with upwardly revised official oil price assumptions. At the same time, foreign exchange reserves have risen to above USD500bn and S&P recently raised the outlook on its BBB+ long-term foreign currency rating to positive (from stable). Concerns remain over state influence over economic affairs. But the liberal-oriented structural reforms outlined by Russia’s new President, Dmitry Medvedev, are welcome.

The government faces some stiff policy challenges. The upper end of the official inflation forecast for 2008 has been raised to 9.5% from 8.5% due to higher food and grain prices. The administration considers inflation to be the single biggest policy concern and has set up a special task force (headed by Deputy PM Kudrin) to come up with policy prescriptions. Traditionally, the exchange rate has been the key monetary policy instrument, but recently the Central Bank of Russia (CBR) publicly has distanced itself from rouble appreciation as a means of containing inflation. CBR has preferred instead to adjust benchmark policy rates and bank reserve requirements. Local demand for rouble liquidity is expected to increase in April as VAT payments fall due. That may put further short-term upward pressure on interest rates.

Forecast is a largely stable rouble versus the (EUR and USD) basket for 2008, with USD/RUB moving in line with RBS EUR/USD forecasts. A longer term view on the rouble must be predicated on the long-term outlook for Russia’s balance of payments. Import growth has reduced the trade and current account surpluses and heavy corporate debt repayments will lead to capital outflows for the first half of the year.