Russian c.bank shows markets who's the boss

MOSCOW (Reuters) - The Russian central bank, which runs over $0.5 trillion in gold and forex reserves, has left currency traders out in the cold as it tries to stop speculators from betting on the rouble's revaluation.

The central bank runs a managed float of the rouble keeping it stable against a dollar/euro currency basket. As Russia sells its oil at record high prices the appreciation pressure on the rouble is growing.

On Wednesday, the central bank said it was changing its intervention technique as part of a transition to an inflation targeting regime, which requires a more flexible exchange rate.

Previously the central bank intervened to when the exchange rate against the basket, made of 0.55 dollars and 0.45 euros, got close to what the market saw as the central bank's top and bottom of its target band of 29.61 and 29.90 roubles.

Large currency purchases turned the central bank into "an bull in a china shop", as one of its officials has said, because it made easy for international speculators to take positions in the currency market.

Dealers told Reuters they could now no longer see the central bank's intervention because smaller volumes of purchased currency and varying bid levels made it no different from other banks trading in the market.

"It has become difficult to make any forecasts now, the banks are wandering like a flock of sheep", said currency dealer Viktor Kholoshnoi from Gazprombank.

IT HURTS

The rouble weakened for a third straight day on Thursday against the euro/dollar basket after weeks of speculation that annual inflation rates of 14.3 percent will leave no other choice to the regulator but to let the currency appreciate.

"It looks like players are now closing their positions, which they opened at 29.60 to the basket. Now it is almost 20 kopecks down. It hurts," said Alexei Zaitsev from Unicredit.

Revaluation rumors became especially intense before the inauguration of President Dmitry Medvedev on May 7 as some of the world's biggest bank said the move was the central bank's only tool to bring inflation rates down.

The central bank dismissed the recommendations as talk of irrational investors while new Prime Minister Vladimir Putin signaled he was prepared to tolerate double digit inflation for a few years, dampening revaluation rumors.

CHICKEN RUN

The speculators now have a choice of closing their positions and losing money or keep betting on the rouble's appreciation against one of the world's largest central banks, which once boasted it can rebuff any attack on the rouble.

"The player who first loses his nerves will lose the game... We are not sure if playing chicken run with a large economy at stake is a wise strategy," Commerzbank analyst Ulrich Leuchtmann said in written research.

First Deputy Chairman of the central bank Alexei Ulyukayev said a more flexible exchange rate policy will make it difficult for speculators to calculate the exchange rate at a given date, decreasing the volatility of capital flows.

"The communication so far has been highly cryptic but from what we can make out, the central bank now plans to inject two-way volatility in the spot market, within the bounds of the current band ," said Rory Macfarquhar from Goldman Sachs.

Most analysts said the new policy will have no impact on the excess supply of foreign currency and the country's current account surplus, which is the main source of the appreciation pressure on the rouble,

"It will make life for short-term rouble speculators more challenging, but it should not change the fundamental picture -- that strong external balances, and high inflation fuel demand for a stronger rouble," said Lars Rassmussen from Danske Bank.

The central bank last allowed the rouble to appreciate against the basket by 0.5 percent in August 2007 after allowing some volatility within the corridor and when it became clear that Russia was set to miss its annual inflation target.

(Reporting by Gleb Bryanski)