USDRUB: So This is What a Currency Collapse Looks Like

16 December, 2014

There’s an apocryphal story about the famous 20th century bank robber Willie Sutton that, when asked why he robbed banks, he replied, “Because that’s where the money is.” Sutton himself has denied uttering the quote, but scientists have nonetheless dubbed the strategy of considering the obvious explanation first as “Sutton’s Law.”

When it comes to the current crisis in the Russian ruble, Sutton’s Law provides the best explanation to the question, “Why is the ruble collapsing?” Because everyone wants to sell it and no one wants to buy it, of course! The reasons that initially precipitated the selloff in the Russian currency, including falling oil prices, poor economic performance and Western sanctions, have been discussed ad infinitum, but now the ruble selling has become a self-fulfilling prophecy.

The latest avalanche of selling started after the Central Bank of Russia (CBR) hiked interest rates by an incredible 650bps (from 10.5% to 17%), in an effort to show that it was serious about arresting the decline in the ruble. The problem was, traders didn’t buy it: after a brief dip from 66.00 down to 60.00, USDRUB again took off in today’s early European session in a true panic. The timeline below encapsulates the escalating crisis (all times GMT):

  • 7:05 – USDRUB peeks briefly below 60, but buyers step in aggressively
  • 8:55 – USDRUB eclipses its pre-CBR rate hike level at 66.00
  • 11:20 – USDRUB breaks above 70.00
  • 11:55 – USDRUB surgest through 75.00
  • 12:10 – USDRUB peaks (so far) near 79.00, rumors of CBR intervention

As the above timeline shows, the selling continued to accelerate to the point where the currency lost a staggering 20% of its value in just four hours! Now that its stabilized (at least temporarily), in the low 70s, the question on every traders’ mind is, “Where will the ruble go next?”

While its impossible to answer that question definitively, the CBR is the proverbial queen on the chess board, so it’s actions will heavily sway trade in USDRUB. It’s not known if the central bank intervened in the market earlier today, but intervention is always an option to try to contain the damage. According to the most recent data we have, the CBR held $430B in currency reserves in October; while this is a notable amount, it’s important to note that the bank may have already used some of its warchest and will certainly be wary of the risk of being overrun by the market, much as last night’s ill-fated attempt to hike interest rates was.

The CBR’s other course of action could be some form of capital controls to limit capital flight. By limiting the amount of funds that can leave the country, the central bank could try to stem the panic and stabilize its currency, though economic theory shows that capital controls often do more damage in the long run.

For now, the ruble remains extremely vulnerable to bouts of further weakness – just because it’s fallen so far does not mean it cannot fall further. That said, the West hardly wants a rogue nuclear state in a desperate economic crisis, so coordinated global action on $USDRUB could be a possibility if the ruble continues its collapse.

Source link  
Gold surges to major $1250 resistance as uncertainty prevails

Gold surged Thursday on a breakout of its previous consolidation to hit and slightly exceed major technical resistance at $1250, a level not seen since early November...

Gold remains vulnerable amid hawkish Fed, strong dollar, equity highs

Gold has climbed sharply since the beginning of the year as the US dollar has pulled back from its late-2016 highs and the US Federal Reserve has exercised characteristic restraint in raising interest rates further after the last rate hike in December...

Gold well-supported on safe-haven flows, lagging dollar

Increasing political and economic uncertainties under the new Trump Administration, coupled with a sliding US dollar since the beginning of the year, have led to a sharp rise in gold prices for more than a month...

Gold pressured as dollar and equities remain supported

As the US dollar found some new life on Thursday and US equity markets hovered right around their new all-time highs, gold extended its recent pullback well below the $1200 handle. Since late December, the price of gold had been in a sharp relief rally from its 10-month lows around $1125 support...

Crude oil maintains bullish trend

Oil prices were initially weaker at the start of the new week, but they have now recovered to trade almost flat at the time of this writing. At the weekend, the OPEC and some producers outside of the group met to discuss the progress of their oil production deal...

Trump press conference fails to deter equity bulls

President-Elect Donald Trump spoke on Wednesday morning at his first formal press conference since the November elections, and the markets were all ears. Trump covered a lot of ground with multiple topics that included...

Gold ripe for potential relief rally

The charts tell a clear story of the unrelenting plunge in gold prices since early November. This steep dive has been the result of several related factors, all of which have the potential to extend well into the new year. These largely Trump-driven factors include...

Could EUR/USD finally break 1.05 on this FOMC day?

The market is demanding a rate rise and the Fed better deliver it today, for if it doesn’t the bank’s credibly will be severely damaged. There is really no excuse not to do so. Economic data has been improving, financial markets are calm...

Mixed Jobs Report Keeps High Fed Expectations Intact

As we noted the day before Friday’s US jobs report, only a significantly worse-than-expected reading for November would have likely made the Federal Reserve’s next interest rate decision more difficult...

In the past 24 hours Bitcoin has lost -3.8% and reached $3324.48864448. Open your trading account with the best cryptocurrency brokers on special terms today.

In the past 7 days the EUR/USD pair has lost -0.0395% and is now at $1.1371. Start trading and making money on Forex today.

In the past 7 days Ethereum has lost -3.56% and is now at $87.0626880318. Have the most popular cryptocurrencies compared online 24/7.

Top Brokers offering Forex Market Analysis

Forex Currencies Forecasts

Top 10 Forex Brokers 2018

# Broker Review
6FIBO GroupFIBO Group84%