What next for the rouble and rupee?

Dubai - Yet this money-making feast is now over

My strategy recommendation to buy the Russian rouble against the US dollar at 78 was vindicated as it surged to 65 last week. However, I believe the rouble is now overvalued at 65 relative to both fundamentals and macro risks. Brent has fallen eight per cent from its high of 48. The US dollar bears short covered their positions after the Atlanta and San Francisco Fed presidents called for June FOMC rate hikes. Bank Rossiya, the Russian central bank, needs to sell roubles to replenish the $90 billion in foreign exchange reserves it haemorrhaged in the 2014-15 oil crash. The Syrian ceasefire brokered by Washington and the Kremlin threatens to fall apart. Russia is still in recession and the economy contracted 1.6 per cent in the first quarter of 2016. Western sanctions on Russia to punish the Kremlin for the Ukraine intervention and annexation of Crimea will continue until July. Corporate profits, manufacturing PMI and business investment are all awful.
Though the sovereign credit risk on Russian Eurobonds has contracted by 450 basis points on long duration debt, I believe the "risk on" trade in Russia will at least pause, though not reverse. The Russian Market Vectors index fund, has risen a stellar 35 per cent from its bottom in February, the reason for my successive bullish strategy columns on Russia in 2016. Russia is the cheapest major global emerging market - but will remain so as long as its index is dominated by oil/gas/metals while Kremlin risks in geopolitics are so unpredictable. Even Putin's own Ministry of Labour expects 600,000 more Russians to lose their jobs in 2016 as the Rodina's industrial rust belt has not adjusted to the grim realities of the commodities crash. Yet inflation has now fallen from 13 per cent last autumn to eight per cent now, an argument for cuts in the 11 per cent central bank policy rate. The rouble was the best-performing currency in the emerging market in 2016, rising from 85 to 65 for a stellar 24 per cent rise against the US dollar. Yet this money-making feast is now over. Oil, capital flows, sovereign risk, central bank policy easing (monetary divergence with the Fed), recession and capital flight all suggest the optimum macro trade is now to sell the rouble at 65 for a six-month target of 72.
It is ironic that despite two years of Modinomics, an oil price crash, massive capital inflows into Dalal Street, the disappearance of the current account deficit, the Indian rupee trades at 66.5 to the US dollar. India is on a roll but the foreign exchange market has still not priced in the fact that the Finance Ministry's negotiations with the global rating agencies could culminate in a sovereign credit rating upgrade in the next four weeks. So I would use any risk aversion mood swings in due to "hawkish" Fed rhetoric to buy the Indian rupee, ideally against low-yielding but overvalued euro and the Singapore dollar.
The "Bharat Mata" (Mother India) carry trade is a money-maker in the current macro-zeitgeist even if the Indian rupee does squat against the greenback. The Rajan RBI has been successful not just in reducing the repo rate to 6.50 per cent, but also boosting the monetary policy transmission process and kick-starting the debate on banking reform. The Rajan RBI has also achieved its policy goal of bringing down the consumer price inflation rate below five per cent. India could well deliver GDP growth of 7.5 per cent, the highest in the emerging markets, at a time the Lok Sabha (hopefully) enacts the bankruptcy code, banking reforms and the GST tax bill. This means the depreciation of the Indian rupee in the next two years will be nowhere as draconian as it was in 2011-13, when the Subbarao's RBI mismanaged money supply growth and spawned a credit Frankenstein that culminated in a 40 per cent currency collapse. It was profitable for Dubai investors to own Indian government debt in 2015 as the RBI implemented successive repo rate cuts. There is still serious money owning long duration G-Sec debt even if the rupee falls to 67 against the US dollar this autumn.
Rodrigo Duterte, the front-runner in the Philippine presidential election, could well be the next occupant of Malacanang Palace. This prospect is the main reason the Philippine peso has depreciated to 47.2 while the stock market index in Manila lost seven per cent in April, the worst performance in Southeast Asia after Kuala Lumpur. The Manila business elite fears the election of the "Filipino Trump". After all, the Makati Business Club once helped to oust both Marcos and Estrada!