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):
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.Publication source