FX: Weak ruble raises hryvnia's TWI

Макроэкономика 24.10.2014 The Russian ruble declined significantly yesterday after midday news that the Russian central bank sold US$1bn within a few hours to defend the currency. In Russia, depositors have been questioning the future path of the currency in response to rising sanctions from the West. There appears to be early signs of a potential run on the currency. The ruble lost 1.9% yesterday as it closed at an all time low of 41.73/USD. We estimate that by its real trade weighted value the ruble's market FX rate corresponds to its fundamental value, which is projected to evolve to 42-43/USD over time. However, if the ruble's market rate could decline to as low as our projection of 45-50/USD, it would signify a widening of misalignment of the ruble's market rate with its fundamental value. We believe that the Russian central bank will lean in this direction as they view a weaker currency as a long-awaited correction of past misalignment. This is not positive for the hryvnia, only signaling further weakness.