FX COLUMN-Short euro/rouble might be the July play

Fri Jul 6, 2012 7:44am EDT

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--Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own--

By Neal Kimberley

LONDON, July 6 (Reuters) - Going short of euros against the Russian rouble might have some merit after Thursday's European Central Bank (ECB) interest rate cut.

The euro has broken below its 200-day moving average (dma) against the rouble and may be poised to test its 55-dma, which is currently at 40.1675.

And while a move to the 100-day level, at 39.5727 on Friday, may be less likely, it cannot be completely ruled out.

The ECB's decision to cut its main interest rate to 0.75 percent and its deposit rate to zero on Thursday could prompt the foreign exchange market to use the euro as a funding currency against holdings of higher yielding currencies.

The rouble may be one of those higher yielders.

While the ECB has eased again, Russia's central bank is keeping monetary policy tight.

It left the refinancing rate at 8 percent, the fixed one-day repo rate at 6.25 percent, and the deposit rate at 4 percent on June 15. [ID: nR4E7JO029]

Its policy stance is likely to have been reinforced by Wednesday's data, which showed Russia's annual inflation rate jumped to 4.3 percent in June from 3.6 percent in May.

If the central bank of Russia held monetary policy tight in the first five months of 2012 when inflation fell, it is hardly likely to become more accommodative when the pace of price rises is picking up.

The rouble might also have some fundamental advantages too, at least in the short term.

Oil and grain prices have ticked back up recently, with potential economic benefits for Russia who is a major exporter of both.

Notwithstanding ongoing Middle East tensions over Iran's nuclear programme, Saudi Arabia on Thursday raised the August official selling price for its light crude for Asia and Europe from July.

Wednesday already saw the price of Russian Urals oil rise and cargoes in the Mediterranean trading at a premium to Brent for the first time since February.

That rally in Russian Urals continued on Thursday as industrial unrest in Norway continued to hit Norwegian oil output.

Of course the oil price could turn lower again, but at current levels it could enhance the allure of the rouble.

Developments in the grain market could also support the rouble.

Corn buyers in Asia, who account for just under half of the world's imports, have been caught on the wrong side of the market as worsening U.S. drought threatens to squeeze global supplies, driving prices to a 10-month top.

Even though the size of Russia's own grain crop has been hit by drought, higher global prices must help.

European wheat hit a fresh contact high on Thursday. Wheat is a major export for Russia.

Oil, grain and a tight Russian monetary policy may make the rouble an attractive July buy against the euro. (Editing by Swaha Pattanaik)

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