Moscow – Russia can add South African President Jacob Zuma to its list of reasons for the ruble’s seemingly unstoppable rally.
Just last week, the ruble was competing with the rand for investors lured by high interest rates in the two emerging-market nations. Now, thanks to Zuma’s move to wrench back control from his market-friendly finance minister, traders are fleeing the rand in droves.
If they’re looking for somewhere to put that money, Russia may be the obvious choice, according to to Societe Generale and Schroder Investment Management.
“The ruble may now appear more attractive by comparison,” said Phoenix Kalen, director of emerging-market strategy at SocGen in London, who recommends buying the ruble against the rand. “Investors are hungrier than ever for yield.”
Less competition from South Africa could give further impetus to a rally in the ruble that’s handed returns of almost 11 percent this year to so-called carry traders, who borrow dollars at a low cost and invest where rates are higher.
Attempts by Russian policymakers to stem the surge in the currency through verbal interventions and an interest-rate cut have fallen flat after the Federal Reserve’s dovish outlook fuelled demand for emerging-market assets.
South Africa’s latest bout of political turbulence knocked the rand off the top spot for this year’s best-returning carry trade. The currency is heading for its worst week since June amid speculation that Zuma is on the brink of firing Finance Minister Pravin Gordhan after he abruptly recalled him from investor meetings in London on Monday. The rand pared its retreat on Thursday after top officials from South Africa’s ruling party were said to oppose Zuma’s plan.
Instead of alerting investors to the dangers of investing in unpredictable emerging markets, the South Africa turmoil is making Russia look relatively stable by contrast, according to James Barrineau, a money manager at Schroders, which oversees $136 billion in global fixed-income assets.
Investors have also grown wary of Turkey, the other country in the Europe, Middle-East and Africa region with a high-yielding currency, amid pressure from politicians, including the president, to keep rates low. By contrast, Russian Central Bank Governor Elvira Nabiullina, who has just been nominated by President Vladimir Putin to run for another five-year term, has been dubbed the most-orthodox central banker in eastern Europe.
“Russia is becoming a less volatile story,” Barrineau, who is underweight South African local-currency bonds, said by phone from New York.
“They’re embarking on a very prudent cutting cycle. They’re guiding market expectations very well, so it’s actually a pretty attractive story on that basis alone.”
Oil outlook
The one thing that could shatter the ruble carry trade is the oil price. So far this year, investors in the Russian currency have ignored a 7.7 percent slide in Brent crude, the country’s main export. That trend could reverse if oil continues its decline, analysts at Citigroup said in a recent research note that recommended selling Russian ruble bonds.
Still, with returns in the developed world limited by bond yields trading near record lows and political risk shutting investors out of South Africa and Turkey, Russia remains the obvious choice for those seeking high-yielding assets, according to Simon Fasdal, head of fixed income trading at Saxo Bank.
The currency had jumped 0.4 percent to a 20-month high by 10:40 a.m. in Moscow on Thursday.
“We do not expect the present investor activity into emerging markets to vanish any time soon,” Fasdal said by email.
“Investors who exit the rand market will look for other emerging-market opportunities in same risk category and ruble- denominated bonds offer some of the same risk-reward characteristics.”