11/05/2014

#ukraine the (un)known (un)knowns of the speculation against the Ruble Maginot defense line

"The ruble weakened to a record as Russia’s central bank moved a step closer to allowing the currency to trade freely in an effort to shake out speculators.

 

The currency slid as much as 3.1 percent against the dollar before trading 1.4 percent lower at 44.2255 by 3:07 p.m. in Moscow. The ruble pared declines after the central bank’s First Deputy Governor Ksenia Yudaeva said further interest-rate increases have not been ruled out. Three-month implied volatility for the currency soared to a five-year high, while wagers for higher borrowing costs fell.

 

Russia spent about $30 billion to shore up the ruble in October as oil’s slide and U.S. and European sanctions over Ukraine worsened the world’s worst currency rout. The Bank of Russia said today it was abandoning its predictable intervention policy to hamper “speculative strategies” against the currency. It also freed itself up to sell foreign currency at undisclosed quantities to defend against “threats” to the nation’s financial stability. http://www.bloomberg.com/news/2014-11-05/russia-changes-r...

I have seen this time and time again before we had the Euro and it made speculators like Soros very rich at the time. National currencies were defended by the Central Banks at a certain rate and than speculators tested it all the time, making lots of money at the same time. It was for this reason that over the weekend national currencies (Belgian franc, french franc, Italian Lire,....) were devaluated and than defended at that level by all the central banks which together had enough money to defend the currency. 

And at the time these national currencies had a fixed exchange rate or one that the banks said publicly they wanted to hold. That is the known known (everybody knows it). The second known known the speculators have to know is the number of resources the central bank has at its disposal (publicly published lately for Russia). The known unknown is in how far China - the only other international rich player which may be willing to help Russia at this moment - is willing to give new loans to Russia to defend its currency. But this maybe a known known to speculators who have bought or got internal or confidential private political and financial analysis by their investigators (called analysts). The unknown known is if the Russian national bank lets its currency float how much lower the currency may sink and how much the speculators may lose, this is their unknown risk. And it is an unknown unknown to the speculators - as long as somebody has not sold that information or some analysts have figured it out - how low the currency may sink if it is floated. And it is basd on this description of what is known and what is unknown and what is possible that speculators are winning or losing (big) money lately with their attacks against the Maginot line of the Ruble.

Why ? Because the Russian Central Bank has spoken so freely of its policy and its resources that there is little that is unknown now.  Even a fake reversal of the trend didn't last long enough because it was known known that this was of no importance. As long as Russia is preparing for war and the war drums are becoming louder and louder in their national media, the prospect of investing in a country in which the leadership seems adrift and disconnected from economic and international reality (which is a known known) makes you take your money and run from the known unknown (what can happen next without running into a new global war in Eastern Europe like some more troops in Ukraine but not enough to make the US send tanks over) and the unknown unknown ( these kinds of local conflicts with different international powers at different sides of the conflict can go out of control and spark the possibilities of a greater or longer conflict with a bigger regional or international impact over a longer period of time). 

And if banks hate one thing now - after the crisis in 2008 - than it is to have enormous 'positions' (some many rubles for a dollar or so many Russian bonds or shares) that may turn out to bring enormous losses for which they have again look for new money to buffer those to pass any stress test or to be credible on the international financial market. 

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