(Bloomberg) — Russian markets have taken historic losses this year and the message coming from traders is that more declines may be ahead for the ruble.
Options pricing suggests there’s a 50% chance the ruble will sink to a record low against the dollar within the next two months — dipping below levels from 2016 when the economy was mired in a recession. Technical analysts are also eying the same move, with a trendline of the currency pair on the verge of giving way.
“Ruble weakness will be larger than expected and it’s here to stay,” said Cristian Maggio, head of portfolio strategy at TD Securities in London.
Markets have been hit hard by escalating tensions, with the latest losses coming after President Vladimir Putin said he would recognize two Russia-backed breakaway regions of Ukraine. While asset prices rebounded on Tuesday as traders speculated about the possible limits of sanctions, key benchmarks are still hovering near multi-year lows.
Both the ruble and Ukrainian hryvnia rank among worst-performing currencies this year, with losses exceeding 5% against the dollar. In equities, the benchmark MOEX index has lost almost a third of its value since October.
Russia’s local-currency bonds have lost about 14% this year, the worst performer in emerging markets, according to Bloomberg indexes. The yield on Russia’s dollar bonds due 2047 rose a fifth day on Wednesday to 5.75%, a three-year high, as of 7:54 a.m. in London, according to prices compiled by Bloomberg.
The sharp moves have strategists questioning their forecasts. Commerzbank AG strategist Ulrich Leuchtmann says there’s a good chance the central bank could step into tame market volatility and raise interest rates to prevent the currency from collapsing.
Leuchtmann, the firm’s head of currency strategy in Frankfurt, is holding onto forecasts for the ruble to trade at 80 against the dollar in the second quarter, though he admits the predictions are “imprecise.”
In stocks, the uncertainty surrounding the political situation makes Russia a hard sell to many investors.
“Even though valuations and dividends seem very appealing and would usually work as a backstop to further price declines, the geopolitical risks pose a meaningful risk to future profitability,” said Sebastian Kahlfeld, a Frankfurt-based money manager at DWS Investment.
