UAH's TWI drops under the weight of RUB sell-off

Макроэкономика 05.06.2015 The Russian ruble found itself again in the spotlight as its losing streak extended for yet another day. Yesterday, it dropped at an accelerated rate of 3.91%, mainly because of a speech by the Russian central bank governor that was negative toward the currency. The ruble's drop had much less to do with the tenuous situation in the Donbas where Russian-separatist forces launched an unsuccessful offensive this past Wednesday. Yesterday's news from the town of Maryinka declared that Ukrainian army re-took the town from Russian-separatist forces and was victorious in the deadly clash. This development was largely priced in the day before yesterday when the ruble fell 2.76%. The ruble's more severe decline occurred yesterday because Russian Central Bank (RCB) Governor Nabiulina, in a keynote speech at the annual monetary policy and banking conference organized by the RCB, stated that FX reserves were seriously affected the Western sanctions which severely limited Russia's access to international capital markets. The governor stated that, as of 1 May 2015, Russia's FX reserves were US$356bn versus the optimal level of "up to US$500bn" which could be accumulated "over a period of several years". Despite her effort to calm market fears of the shortfall in reserves, she also emphasized that authorities have no intention of defending the ruble should it be under pressure to appreciate. Meanwhile, FX markets globally were quite volatile. Although the euro traded above 1.13/USD, it closed the day at 1.1283/USD, or 0.33% lower to the previous day. The US dollar was flat as its index remained at the same level yesterday to the previous day. The hryvnia lost 0.48% to close at 21.05/USD, indicating that capital controls do tame market players that otherwise would have bet on its weakness given the Donbas war uprising in Maryinka. The hryvnia's trade-weighted value rose 0.67% due to the ruble's severe decline. If extended over time, this development-of UAH's TWI appreciation due to RUB's decline-is negative to the hryvnia as it makes its market rate more vulnerable to future devaluation pressure.