bne -

The ruble surged more than 5% to RUB41 per dollar on October 31 from a fresh record low reached after months of devaluation, in apparent expectation of higher interest rates to be announced later today.

With Bloomberg predicting a 50 basis point rate hike, taking the Russian central bank's main interest rate to 8.5%, and the central bank possibly set to announce an early shift to a ruble free float, traders were reportedly reducing short positions. "Some aggressive position squaring may have been the key driver behind today’s move," said Anne Benoit of Societe General in an email. "There is some significant nervousness about the risk that the central bank of Russia may do something dramatic tomorrow," she added.
    
“It looks like a short-squeeze,” said Denis Korshilov, head of trading at Citibank. "A technical correction is long overdue, especially ahead of the central bank’s possible interest rate increase,” Bloomberg quoted him as saying.

Beyond a looming interest rate hike, one possible explanation circulating for the turbulence on the trading floor is that the central bank could announce an early switch to a ruble free float, with analysts at Sberbank CIB anticipating such a move.

Russia's central bank has spent nearly $68bn on currency interventions so far in 2014, despite being believed to broadly back a ruble devaluation. "The CBR [Central Bank of Russia] has made it pretty clear in recent months that it quite likes a weaker ruble - for all the factors noted above, and has not done much to draw a clear red line in the sand in defending the ruble," Standard Bank analyst Tim Ash wrote in a note.

The switch to a free float is slated for January 2015, and an early move would reduce the haemorrhage in reserves.

According to Alfa Bank's Natalia Orlova, rumours of pending switch to a free float may have driven down the ruble to its historic low of RUB43.9 to the dollar early on October 30, with alleviation of fears prompting a rally, along with "a massive sale of unclear provenance”, Orlova told Vedomosti.

Most analysts however are not expecting any dramatic measures from the central bank that could justify the more than 5% surge. "We believe that the rate hike will be measured, only a 50bp move, and that the CBR will not move to a free-float exchange rate regime," Societe Generale's Anne Benoit wrote.

Other reports spoke of differing predictions within one and the same institution, with Morgan Stanley economists predicting a 50 percentage points hike while their currency traders anticipate a 100-150 percentage point hike, according to business daily Vedomosti.