Russian Ruble continues to sink in oil glut

On Monday, following the news of the strike by the Kuwaiti oil and gas workers, the price of crude oil increased 3.27% to $41.03 per barrel.

Russia, being a commodity based economy, saw its currency, the Ruble, strengthen against the US dollar.

The USDRUB currency pair touched a low of 65.3715 on April 19th, 2016.

However, the Ruble lost steam as soon as the strike was called off by the workers of the Kuwait Oil Company (KOC).

With production volumes expected to return to normal level of 3.3 million barrels per day very soon, analysts’ believe that Ruble would further weaken against the US dollar because of the reasons discussed underneath.

CNN

Firstly, the crude oil supply continues to remain above the demand level. The price of crude oil will go up firmly only when the glut is consumed by an increase in the global demand. It should be noted that the US inventories, excluding the Strategic Petroleum Reserve, increased 6.6 million barrels to 536.6 million barrels at the end of the first week of April.

Secondly, the Ruble continues to remain volatile in the forex market. Quite easily, Ruble moves plus or minus 20% against the US dollar in a given month. Thus, considering the currency exchange rate risk, the banks in Russia charge high rate of interest of up to 20%. The higher borrowing cost discourages companies from expanding their production by purchasing new equipment on loan. In fact, 20% of Russian machineries have already crossed their life span. This ultimately reduces productivity, thereby making the country uncompetitive in the international arena. As the export revenue and GDP decreases, the Ruble gets weakened further.

Contrary to several announcements, Russia is yet to see an appreciable level of investments from the Chinese investors. The worrisome case is that several Chinese companies are diluting their investments in Russia. For example, in February, the stake in the Moscow stock exchange was sold by the China’s Chengdong Investment Corp.

Russia now expects the European countries with negative interest rates to come to the rescue.

Finally, the Russian budget uses Rubles to calculate domestic expenditure and liabilities, while foreign currency accounts for half of the government revenues. This process has resulted in less petrodollars and more Rubles. Experts are worried that this imbalance may ultimately cause devaluation of the Ruble in the long run. Thus, fundamentally, traders should any decline in the USDRUB currency pair to take a long position or exit a short position.

The USDRUB currency pair has formed a bullish swan harmonic pattern in the price chart. A difference of 600 pips separates the resistance and support at 68.93 and 63.80 respectively.

Thus, a currency trader should take a long position near the 64 level with a stop loss of 200 pips below the entry point. The profit for the long position should be booked at 68.50 levels. A binary or digital options trader should ideally choose a one touch call options contract to trade with. Considering the volatility, a strike price of 67.50 and an expiry date in the third week of May would make the trade almost risk free.

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