Russian Currency Crisis and Defaults Could Create Contagion in West
Russia’s currency market witnessed further huge volatility again today. The finance ministry said it would start selling foreign exchange which are primarily in dollars. This appeared to reduce selling pressure on the battered rouble.
The fall of the rouble this year has been severe, with a 50 percent fall against the dollar and of course gold this year. The slide has been precipitous as in the past two days alone, it fell about 20 percent against the dollar and gold.
On Monday, the ruble fell 10% against the dollar and gold followed by another crash of 11% on Tuesday, despite a massive rate hike.
The heavy selling pressure this week, made the central bank sharply increase its key interest rate by an unexpected 6.5 percent or 650 basis points. The move did little to buttress the currency in the short term as speculators and traders continued to sell the rouble.
Momentum is clearly down and computer driven markets and increasing dominance of algorithmic or black box trading is exacerbating the rouble’s short term weakness. However, the sharp increase in interest rates and the fact that the fundamentals of the Russian economy remain reasonably sound and not much worse than many western economies, will support the rouble. It is likely to stabilise at these levels and recover in the coming months.
It is also important to note that political and economic relations between Russia and China are very good at the moment and China would likely provide financial assistance – if indeed that is needed…