Thursday, April 7, 2016

When this happens buy the ruble

russia cutting rates

Russia's central bank chief, Elvira Nabiullina, is thinking about cutting rates. When she jacked rates up to 17%, like, overnight a little over a year ago she actually did much of the work of pushing inflation way up, which was a problem she was supposedly trying to fix. However, she doesn't understand that. The ruble plunged. Another thing she was trying to avoid.

Finally, she is now considering lowering rates. When that happens by the ruble. (There are futures contracts on the CME.)

Rate cuts are price cuts: they lead to lower, not higher inflation. Currencies rally. (Eventually, after the clueless first sell. Take their money please.)

Rate hikes on the other hand are price hikes, that's why the dollar is falling and you saw gold take off out of its four year bear market the mintue the Fed hiked rates back in December. The gold rally literally started on the day the Fed did that.


Diego Marcio said...

Mike, Even for emerging markets works like that? I mean Brazil, Russia, China etc? If the rates are cut currencies tend to rise and vice versa? Or that principle is only really applicable for developed markets?


Footsoldier said...

Does the Bank of Russia have a date and a sit down like the rest of them Mike or do they wake up one morning and just announce it ?

Michael Norman said...

They have dates, I just don't know when. Let them announce and then act.

Footsoldier said...

It also looks like the ECB is also going to cut on the 21st :)

ECB policymakers united on stimulus measures - as it happened

Footsoldier said...

Footsoldier said...

If ECB cut on the 21st I'm buying eur/usd right ?

Footsoldier said...

Mike does OANDA charge users of their platform ?

Footsoldier said...

I've sent you an email.

Michael Norman said...

No. They make money on the "spread" as all FX brokers do.

Michael Norman said...

ECB rate cut would be euro bearish initially. That's how everyone will react. Then probably higher. Euro's got some "crosscurrents" now. If it weren't for "Brexit" I think euro would be screaming higher now, like yen, but Brexit's got everyone nervous. I've been buying EURUSD on dips, and trading it like that.

Michael Norman said...


Russia raised rates and the ruble's been weak as hell. Brazil raised and the rial is garbage. India raised, same. Turkey, same. When the stopped raising or, cut, the currencies recovered.

Of course the "clueless crowd" does the opposite all the time and that may create those moves you are alluding to. But they don't last.

Footsoldier said...

Cheers Mike.

It defo sounds from the link they are going to cut on the 21st.

To buy the dips on the Dow Jones Industrial what's the best market to choose on OANDA?

I have half a dozen to choose from here ?

michael nitzan said...

Hey Mike,

Why do you think it's the Russian CB's rate hike that propelled the Ruble lower? How would the mechanic of such a process work..? This implies a 'demand-pull inflation' - i.e. Russia is suffering from excessive aggregate demand which induced inflation. Is that really the case? Was there a substantial rise in employment, GDP etc.?

I think the reason behind the Ruble's weakness is much more due to 'cost push inflation' the change in the energy prices since mid-end 2014 -

1. Descriptive reasoning - the correlation between RUB/USD and Oil prices in the last 2 years is quite clear.

2. Theoretical reasoning - the value of Russia's currency, the Ruble, in relation to other currencies (e.g. USD) is of course dependent on foreign demand for it. As almost all of Russia's export is energy commodities (oil and natural gas), foreign demand for Rubles is based on the demand for oil. As oil prices decline, the foreign demand for Rubles decline with it. Therefore, the value of the Ruble vs. USD deteriorates. This is true as long as the price of oil stays low.

Kind regards,