Ruble plummets as oil reasserts dominance

Bloomberg

The ruble weakened for a second day as speculation the dollar will strengthen under tighter Federal Reserve policy dimmed its carry-trade appeal and it came under the influence of weaker oil prices.
Russia’s currency weakened 0.3 percent to 65.065 against the dollar by 11:54 a.m. in Moscow. The Micex index of major stocks dropped 0.8 percent after closing at new record high of 1,993.35 on August 26. Crude oil fell 1.4 percent in London to $49.20.
Indications by Federal Reserve Chair in a speech at an annual symposium in Jackson Hole, Wyoming on Friday that the U.S. recovery is gathering steam were interpreted by traders as a hint of higher rates later this year.
That would wipe out profits from buying higher-yielding rubles with borrowed dollars, known as the carry trade.
“The ruble has diverged from its fair value in the last few weeks on the back of carry trade flows into emerging assets,” said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki. “Now, after the Jackson Hole speech we expect the ruble to follow oil more closely.”
Crude Control
Oil is reasserting its dominance over the currency, with the link between the two at the strongest since May. The ruble has belied persistent selloffs in crude, the nation’s biggest export earner, and marked a departure from patterns it established after Russia’s switch to a free-floating exchange rate in 2014. On Monday, the currency resumed trading in tandem with oil, as the 30-day correlation to crude climbed to 0.73, after falling to 0.53 on Aug. 12. A reading of 1 would mean the two are moving in lockstep.
Russian government bonds fell for the first time in three days with the yield on the benchmark 10-year rising two basis points to 8.29 percent.