Kazakhstan Tenge Poised To Mirror Gains By Russian Ruble
May 04. Dow Jones. NEW YORK
By Cynthia Lin
-Missed out on the Russian ruble’s ascent? Try the Kazakh tenge.
-Rising oil prices fueled ruble strength, while tenge gains have been contained
-But Kazakhstan’s plans to remove the exchange band and fight inflation should lead tenge higher
Unlike Russia, Kazakhstan has held its currency back from rising with oil prices this year, leaving the tenge with plenty of room to strengthen as it moves to a floating exchange rate.
Oil-rich Kazakhstan bought $700 million of foreign currencies in April to stem tenge strength, while surging energy prices helped to lift other commodity currencies including the Russian ruble. Without those interventions, analysts say, the tenge would have echoed the upward pattern of the currency of its prominent neighbor and largest trading partner.
The two Commonwealth of Independent States members, while divergent in size, have otherwise parallel economies as major oil exporters to the world. Kazakh authorities also often emulate economic policies implemented in Russia.
“Where Russia goes, Kazakhstan follows,” said Timothy Ash, head of emerging-market research at RBS, “and Kazakhstan actually benefits from much stronger growth dynamics than Russia.”
And aside from the currency interventions, that policy mimcry has continued of late.
Early in March, Russia widened the ruble’s trading range against its dollar-euro basket to help tame inflation, allowing the ruble to strengthen to the lower edge of the band at RUB32.45.
Kazakhstan’s central bank also returned the tenge to a managed float, but still worked to keep it trading within the boundaries. It eased a two-year-long corridor initially set at five tenge above or below KZT150 per dollar. The tenge recently traded at KZT148.48 to the dollar.
Then on March 9, Kazakh authorities raised policy rates for the first time in more than three years, a move that some analysts say “copy-catted” Russia’s late February rate increase.
If the Russian ruble is any sign, the tenge is in store for strong appreciation. The ruble is more than 11.5% stronger against the dollar this year, making it one of the world’s best performing currencies. That comes in contrast to the tenge’s paltry 1% gain.
“The fact that the Russian ruble is appreciating supports appreciation in the tenge,” said John Peta, portfolio manager at Acadian Asset Management. “They have similar conditions if you will: exporting oil and both have inflation.”
Peta’s fund first bought exposure to the tenge last November as a long-term play through currency forwards.
The case for tenge appreciation also becomes clearer as Kazakhstan sees more robust domestic growth. With its economic recovery well established-some economists are forecasting 4.5% growth this year-authorities recently signaled they are keeping a closer eye on rising prices and monitoring how effective the ruble’s rise will be on denting inflation.
According to its 2011 monetary policy plan, the National Bank of Kazakhstan aims to keep inflation under 8% and allow a stronger tenge to help curb prices as it gradually moves to a floating exchange regime. The official guideline specifically said that any oil price above $65 a barrel would likely allow for a stronger tenge. Crude-oil prices now hover near $110 a barrel.
Still, the tenge offers a less-liquid market for those hoping to bank on its rise. Kazakh officials have also proven sensitive to hot-money inflows, raising talk of capital controls to fend off foreign investments. Investors abroad often look to nondeliverable forwards and, as analysts at Morgan Stanley recommend, investing in the Kazakh national oil company Kazmunaigaz for tenge exposure.
But with presidential elections out of the way, which is thought to have encouraged officials to foster further growth and keep the financial market steady, the tenge is primed to follow in the ruble’s footsteps.
“There was a political context with elections where a stable currency is advantageous,” Ash said, “but down the line, the story is going to be one of appreciation.” Both RBS and Morgan Stanley see the tenge strengthening to KZT138 on the dollar.