Unexpected Hike Leads to Unexpected Reaction in USDRUB

Earlier today, the Bank of Russia surprised traders by hiking its main interest rate by 50bps from 7.5% to 8.0%. Not one of the 23 economists polled in a pre-meeting survey by Bloomberg had expected an interest rate hike; in fact, one particularly bold economist was calling for a 25bp cut! What these economists failed to take into consideration was the interplay between economics and geopolitics.

The international uproar over the downing of Malaysian Airlines flight MH17 by pro-Russian separatists in Ukraine has substantially increased the likelihood of further anti-Russian economic sanctions from the West. In a preemptive move, the Bank of Russia chose to raise interest rates to make the country’s capital markets more attractive for global investors. Frankly, traders don’t have to go back too far to see what the central bank fears: when Russia was in the process of annexing Crimea back in March, investors pulled their funds from Russia, driving the ruble to an all-time low against the euro and the US dollar and stoking inflationary forces. This dynamic prompted the Bank of Russia to hike rates by a total of 200 bps in just three months.

Of course, the most important question from here is, “could the Bank of Russia hike rates again?” Based on its statement, the answer is “maybe.” The statement specifically notes “Should the inflationary risks persist at a high level the Bank of Russia will continue hiking the key rates,” suggesting that the central bank remains far more concerned with rising prices than with weak economic growth.

Technical View: USDRUB

Unfortunately, even the central bank’s aggressive actions were not enough to support the ruble. After dipping midweek, the pair appears set to close the week near the highs. Indeed, the recent price action can be seen as a tight bullish flag pattern, with a potential break above the 2-month high at 35.25 opening the door for a run up toward 36.00 next. As we’ve noted before, the inverted Head-and-Shoulders pattern and secondary indicators also augur for further gains in the weeks to come.

Heading into next week, a break above the 35.25 level would set a bullish tone for a possible move up toward 36.00. Meanwhile, only a break back below the 50-day MA at 34.40 would erase the pair’s bullish bias.

Source: FOREX.com