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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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What Is The World’s Most Volatile Currency?

Moscow

The Russian ruble has come close to earning itself the dubious distinction as the world's most volatile currency--a tag for now belonging to the South African rand and the Turkish lira.

The ruble has finished one of its worst weeks in the new Millennium, shedding 11 percent after touching 65 versus the dollar briefly, and descending to its lowest level since 2016 as tensions around Syria intensified.

(Click to enlarge)

Source: X-Rates

The ruble's implied (expected) volatility reading of 11.9 percent now sits just 80 basis points shy of dethroning the rand as the world's most volatile currency.

Although Russian has faced a slew of sanctions since the Ukraine standoff, the latest U.S. sanctions on some of the country's largest companies and oligarchs are by far the most punitive.

(Click to enlarge)

Source: Bloomberg

For the first time, large publicly traded Russian companies have been placed on the black list. Further, the U.S. has warned British banks of “severe consequences” if they continue having dealings with the 24 Russians, including seven oligarchs, on the list. Related: Elon Musk’s $2.6 Billion Tesla Challenge

Russia never saw it coming. Trump's administration has been treating Moscow with kid’s gloves, lulling the Kremlin into a false sense of security. The U.S. administration's only prior warning came after a new law demanded more action from the government to which it responded by publishing a list of Russian billionaires that seemed culled straight from Forbes Magazine.

But growing tensions with other Western countries in recent weeks might have snapped Washington’s patience. The UK announced several retaliatory measures against Russia, including expulsion of 150 diplomats, on allegations that it poisoned a British ex-spy right on British soil.

Far-Reaching Effects

The Kremlin has largely downplayed the sanctions and feels confident that the country will adjust to the situation quickly.

And it does have some options. It can choose to buy the distressed companies from their billionaire owners and refuse to honor American debt obligations. About half of Russia's government bonds are dollar-denominated.

But this flippant attitude is simply an attempt to hide a grim reality. The unfolding chain of events shows that the government was ill-prepared for a fallout.

The Russian government had established several tax havens to protect the fortunes of its rich minority. But there’s little it can do now to stop massive capital flight as jittery investors take to their heels.

And this could escalate to new levels if Washington decides to follow it up with more sanctions. For example, the U.S. government could conceivably ban its citizens from buying newly issued bonds thus starving the country of much-needed dollars.

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But perhaps the biggest risk to the Russian establishment would be if its wealthiest citizens start baulking at the idea of partnering with the Kremlin for fear of reprisals.

(Click to enlarge)

Source: Bloomberg

Ruble Could Weaken Further

Wall Street is divided about the possible trajectory of the ruble from here with some saying it has already bottomed while others think it will slide further. But little of that is in Russia's hands at the moment. The latest round of the ruble weakening against the rand has in part to do with the rand's own exploits.

(Click to enlarge)

Source: Bloomberg

The rand's implied volatility has dropped below that of the ruble, lira and peso for the first time since 2005. That's a clear reflection that investors are optimistic of favorable economic reforms under the new president, Cyril Ramaphosa. It's probably a matter of weeks before the ruble finally sinks into ignominy as the world's most volatile currency.

By Alex Kimani for Safehaven.com

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