RUB: Outperformance does not seem warranted - BBH

According to analysts from Brown Brother Harriman, the Russian economy is showing signs of bottoming but warned that based in fundamentals ruble’s outperformance does not seem warranted.

Key Quotes:

“Despite the sanctions, the Russian economy is finally showing signs of bottoming. GDP growth is forecast to contract -1% in 2016 and to finally grow around 1% in 2017.  This compares to -3.7% in 2015.  GDP contracted -1.2% y/y in Q1, the shallowest contraction since Q4 2014.  Given higher oil prices and low base effects, there are upside risks to the growth forecasts.”

“Fiscal policy has deteriorated. Low oil and commodity prices coupled with the recession have led to a widening budget deficit.”

“The external accounts have held up well. Lower oil prices have hurt exports, but the deep recession has slashed imports”

“The ruble has outperformed this year after a terrible 2015.  In 2015, RUB lost -20% vs. USD.  This compares to the worst performers ARS (-35%), BRL (-33%), ZAR (-25%), COP (-25%), and TRY (-20%).  So far this year, RUB is up 12.5% YTD and is behind only BRL (+13%).  Our EM FX model shows the ruble to have WEAK fundamentals, so this year’s outperformance does not seem warranted.”

“USD/RUB is trading at the lowest levels since November.   A clean break of the 65 area would set up a test of the November low near 62.34 and then October low near 60.59. The 62.58 area represents the 62% retracement objective of the big May-January rise.  A clean break would set up a test of the May 2015 low near 48.14.”

“With inflation likely to continue falling and the central bank’s next likely move to be a cut, we think Russian bonds will continue outperforming.”