Chart Of The Day: Bearish Russian Ruble Comes Roaring Back...For Now

On Feb. 22, as Russian troops were amassing along portions of the Ukraine border and the possibility of a Russian incursion began to look probable, the US and U.K. instituted sanctions against Russian banks and oligarchs close to the country's president Vladimir Putin.

Just days after Russia invaded Ukraine on Feb. 24, Russian banks were removed from the SWIFT, the global interbank system that enables financial transactions and payments between banks worldwide. In addition, the West placed sanctions on Russia's central bank, in order to prevent it from liquidating its $630 billion in foreign reserves as a way of offsetting increasing sanctions.

Russia's currency, the ruble, collapsed between Feb. 24 and Mar. 7, dropping as much as 104.7% when the USD/RUB pair hit a record low of 143.000. The ruble's demise was a clear illustration of Russia's vulnerability. Indeed, in a speech given during that period, US President Joseph Biden famously derided the Russian ruble, saying it had been reduced to "rubble."

Yet, as of this week, the ruble has erased all of its losses and returned to pre-Ukraine-invasion levels. Does that mean that ongoing sanctions have been ineffective?

According to US Secretary of State Anthony Blinken, Russian authorities are using plenty of behind-the scenes manipulation to artificially boost the country's currency. He said, "people are being prevented from unloading rubles… That’s artificially propping up the value.” However, such government control isn't sustainable indefinitely Blinken noted, adding, “I think you’re going to see that change.”

Will the Russian currency continue to strengthen, or might this be a good time to short it? We can't know what the future holds, of course, but more likely than not, this could be a buying opportunity from a psychological perspective.

Because of a spike of 104% in about two weeks, traders are keenly focused on the technicals. Therefore, for now we predict that the majority of them will be long-oriented. This dynamic is reflected in the chart.

USD/RUB Weekly

After the USD/RUB crashed the price returned toward the uptrend since mid-2014, indicating that demand has been on the rise for the dollar versus the ruble overall.

Also, the price returned to the levels where demand had stopped short since December 2014. That dotted line represents strong resistance.

However, once demand overran supply, it's expected to have been flipped to support. The price dipped below that dotted line at 80.00, but only on an intraday basis. Even if the 80 level does not hold, the price is again nearing the long-term uptrend.

If you look at both lines together, they form an Ascending Triangle, inherently a bullish structure which occurs when demand has been outpacing supply. However, these triangles generally develop over months, not 7.5 years.

It would be interesting, then, to know how this one will play out. If a pattern of this size follows standard development, it would suggest that the USD/RUB price could return to record highs. Moreover, the recent spike completed a rising channel, increasing the likelihood of a return toward its top, perhaps even higher than the 120 level.

The moving averages have been maintaining a bullish structure, in which each shorter dated MA rises higher than the longer-dated counterpart, demonstrating improving pricing over time.

The 200 DMA has explicitly realigned with the uptrend line/rising channel bottom, explaining its significance.

Trading Strategies

Note, that given the base is the dollar—i.e. USD/RUB—a long or a short refers to the US currency versus the Russian one.

Conservative traders should wait for either the uptrend line since 2014 to break before taking a short position, or bounce off it for a long. Similarly, if the price accumulates above the 80.0000 level, which is a support-resistance level since December 2014.

Moderate traders could be content to risk a long position if the price reaches the 70.0000 level or breaks through the 80.0000 level.

Aggressive traders could go long now, provided they are willing to accept the higher risk that accompanies the higher rewards gleaned from moving before the rest of the market. Money management is critical. Here is an example:

Trade Sample – Aggressive Long Position:

• Entry: 75.0000
• Stop-Loss: 74.7500
• Risk: 2,500 pips
• Target: 80.0000
• Reward: 50,000 pips
• Risk-Reward Ratio: 1:20