The rout in the Russian rouble continues this morning with a 1.4% fall to USDRUB54.80, when you consider this is one of the ten largest economies in the world, it should give you a sense of how extraordinary this is. Not since the height of the global financial crisis in 2008 have we seen sustained moves of this magnitude in the currency markets, and we have reached a stage where episodes like the Icelandic devaluation pops into my mind. Don’t get me wrong, Iceland was a small economy that possessed a banking system that was leveraged to almost comic levels. My point is that Iceland was the first really non-standard macro-economic event that occurred as the sub-prime disaster was really starting to gather pace. At a certain point in time one is forced to wonder, are there other potential victims of oil (let’s not kid ourselves, sanctions are also part of the equation where Russia is concerned), are there entities or countries that are exposed to Russia which could suddenly take centre stage? My point is that Russia is a $2trn economy, its currency doesn’t lose 50% of its value in 3 months without adverse repercussions elsewhere. Benign equity and risk markets, you’ve been warned!
You would think that this continued rouble weakness is happening in tandem with dramatically weaker oil prices today, but this is not the case. Energy prices are consolidating after the recent dramatic falls, and whether we have already seen the bottom or not is a story for another day. For what it’s worth I suspect we will see more pressure in the coming weeks before there’s any realistic basing in this move. To be clear.. the rouble is not weakening in isolation.. both the Mexican peso and Nigerian naira are also in the firing line today but to a much lesser extent. I read a great piece in the Financial Times yesterday which argues that the fall in the Russian rouble means that there will probably be only a negligible impact from a lower dollar price of oil on government revenues which are rouble denominated – the rouble price of oil is virtually unchanged. You can’t say the same for the price of oil in Nigeria or some of the other oil dependent economies though, for example in Nigeria the naira price of oil is substantially weaker (~20%), which should hit government revenues. Food for thought, but Nigeria is far more import dependent than Russia so there would be collateral damage somewhere along the line. Looking at the Mexican peso, we are now past USDMXN14.10 which is likely to convince some market technicians that the path is clear for a significant bullish advance. I must say, this is the beauty of technical analysis.. you view a chart without prejudice and it tells you a story, even if there is a compelling fundamental narrative which should see Mexico benefitting from robust growth in the United States and thus boost the peso. Please note that a significantly weaker Mexican peso would pose as much of a competitive risk to China as does a weaker Japanese yen. This is because Mexico will always be a first choice alternative to China when global companies are looking to export into US markets. Collateral damage everywhere…
Over the last 24 hours, we are seeing definite signs that the dollar bull trend may be reasserting itself. The euro has made a new year to date low, as have currencies like the Japanese yen and Australian dollar… all versus the US dollar. We still have a month to achieve the targets we speculated upon 3 or 4 months ago (EUR/USD to 1.22 etc) and the current price action increases our confidence that we will get there.
This morning we have seen some mixed PMI data from some Eurozone countries with disappointing numbers from Spain and France, better than expected numbers in Italy, and stable numbers in Germany, leading to roughly in line numbers for the Eurozone as a whole. Meanwhile PMI data in the UK was a strong positive surprise. It’s only one data point, but I continue to support the view that the pound sterling has room to appreciate versus the euro. This afternoon we will get ISM data in the US, which is always important, economists expect a slight improvement. We also get Eurozone retail sales very shortly, as well as an interest rate decision in Canada. This is the first week of December, so we still have employment data at the end of the week in the United States to look forward to, this will compete for key data event of the week with the interest rate decisions from the ECB and Bank of England tomorrow. Much to look forward to!