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Russian Ruble strengthens on higher crude oil prices

russian rubleRussia, which is geographically the largest country in the world, saw its currency exchange rate crash to a low of RUB 85.9097 against the US dollar in January 2016.

However, the Russian Ruble showed enormous resilience to bounce back to RUB 71.1244 on Monday 7th, 2016. Traders and analysts believe that the gain of 17.2% against the US dollar is only an indication of further strengthening, which would probably happen in the coming weeks because of the reasons discussed below.

Fundamentally, Russia is a commodity driven economy. The country produces 14% and 18% of the world’s oil and natural gas output. Russia is also a major producer (12% of global production) and exporter of nickel. The petroleum products contribute almost a quarter of the country’s GDP of about $2 trillion. In fact, 30% of Russia’s budget is met by the revenues from the energy sector.

The decline of the crude oil had a disastrous effect on the exchange rate of the Ruble.

Bloomberg Business: 21 Dec 2015

When a barrel of crude touched a high of about $147 in 2008, the exchange rate was about RUB 30 to a US dollar. The exchange rate managed to stay stronger at RUB 35 to a dollar, as long as the crude traded above $100 per barrel. The break-even price of crude for Russia is about $112 per barrel.

Following the decline of the crude oil below $90, the USDRUB pair started appreciating above 35. Furthermore, Russia’s intervention in Ukraine and the resultant sanctions aided a sharp decline in the exchange rate of the Ruble.

However, things have changed a lot in the past few weeks. The price of crude touched a high of $40 on Monday. Similarly, the price of iron ore (62% Fe content) rose 19% in a single day to hit $63.74 per ton. It is the biggest gain of iron ore since 2009.

Furthermore, steel prices in China rose 15% following Beijing’s commitment to boost growth through further easing. The recovery in the price of crude oil and other commodities has resulted in the decline of the USDRUB pair to 70.1244 on Monday.

Russia is also the largest exporter of platinum. The recovery of platinum above $1000 per ounce is also supporting a better exchange rate for the Ruble. In the past five years, the revenue from the exports of gems and precious metals has increased 99.5% to $7.4 billion.

Likewise, in the past five years, the revenue from the export of Russian machinery has increased 52.8% to $8.1 billion, while the export revenue from cereals has increased 24.5% to $5.5 billion. Even though these products cannot match up with oil exports, which bring about $170 billion in foreign exchange to Russia, still the positive impact cannot be underestimated. Thus, considering these facts, it can be argued that the USDRUB pair will remain range bound with bearish bias in the short-term.

The price action, reflected by the chart, shows that the USDRUB pair faces major resistance at 74.78. Considerable buying support for the currency pair is seen at 71.50 and 66.75.

USD/RUB Pair : March 10th 2016

The declining channel indicates that the downtrend is yet to complete. The RSI reading below the 50 level indicates bearishness in the counter.

Thus, it would be wise on the part of a forex trader to go short near the 73 level, with a stop loss above 75. The target for the short trade would be ideally 67.

The target reflects a risk to reward ratio of 1:3. From the perspective of a binary options trader, a put options contract should be purchased. The expiry date for the put options contract should be preferably March end. For the put option contract, a strike price of RUB 70 is recommended.