The USD/RUB pair has recently fallen to its 2-month low. It may seem that the ruble refuses to follow the basic law of fundamental analysis when a strong economy determines a strong currency. The Russian currency is extending gains for 5 consecutive trading sessions, while Bloomberg analysts expect Russia's GDP to contract by 16% in the second quarter due the COVID-19 pandemic. This will be the worst result since early 1990s. However, when the whole world is in recession, such economic downturn is not a reason to sell the national currency.

The Russian authorities also hold a realistic view on the GDP prospects. Moscow expects a reduction of 7.8% in 2020 whereas the Ministry of Economic Development estimates that the losses from coronavirus will reach $1.3 billion daily.

Russia's GDP dynamics

In times of global recession, economic losses are inevitable. The UK economy is likely to face the worst contraction in three centuries, while the United States and the eurozone will be able to return to the pre-crisis levels only in 2021-2022. Therefore, for the non-residents the situation in Russia does not seem so critical. That is why they are actively buying federal loan bonds issued by the Russian government hoping that the Bank of Russia will further ease its monetary policy. The 10-year bond yields fell to 5.44%, the lowest level since the start of trading in 2007. However, experts at Citi predict that the regulator may cut the key rate from 5.5% to 3%. So buying now in conditions of falling yield is a good strategy.

Taking advantage of the favorable situation, the Ministry of Finance is actively increasing emissions and attracting assets at historically low rates. The ministry managed to attract a record 112 billion rubles ($1.6 billion) at the 7-year bonds auction. The total amount of applications reached 149 billion rubles.

Russian federal loan bonds dynamics

Apart from the increased demand of non-residents for Russian debt securities, the ruble gains support from rising oil and rally of US stock indices. The reopening of major global economies and hopes for their subsequent recovery as well as successful laboratory studies of the COVID-19 vaccine supported global demand for oil and reduced fears over the coronavirus infection. As a result, risk appetite is rising thus boosting the growth of emerging market and oil-dependent currencies.

USD/RUB bears are now gaining ground, especially after the new conflict between Washington and Beijing has not escalated further. Earlier, Donald Trump accused China of concealing information about the coronavirus and threatened to increase tariffs. Fortunately, this negative scenario did not get any further development. China has increased purchases of American agricultural goods. However, Donald Trump remains rather critical, saying that Beijing cannot wait to see his defeat in the elections. In the current situation, it is good to keep the short positions on USD/RUB formed at the breakout of the support level at 72.5-72.6. The levels of 68.7 and 65.3 will serve as medium-term targets.

USD/RUB daily chart