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. Last Updated: 07/27/2016

Central Bank Allows the Ruble to Strengthen 0.4%

The Central Bank on Tuesday allowed the ruble to strengthen by 0.4 percent compared with the previous day's close in the first deliberate revaluation move this year.

The ruble strengthened to 29.56 against the Central Bank's policy basket, made up of 0.55 dollars and 0.45 euros.

The move came one day after the bank had raised its interest rates by 0.25 percent. The revaluation took markets by surprise, but was more moderate than expected.

"The timing for both the rates and forex moves are a surprise … but the direction is as expected, another very cautious step toward policy tightening," said Rory MacFarquhar, managing director at Goldman Sachs in Moscow.

The ruble has traded on the weaker side of 29.61 against the basket in recent months. Markets expected the Central Bank to revalue the ruble in order to curb inflation, which is running at over 15 percent on an annual basis.

Several major international banks advised their clients to take long positions in the ruble expecting the revaluation to take place shortly after President Dmitry Medvedev took office in May.

Central Bank first deputy head Alexei Ulyukayev said the move was not a revaluation but a widening of the trading corridor in both directions, and warned investors that the new currency policy has made the ruble trade riskier.

"I think it will soon become clear that the risks they [investors] are taking when they open their positions are comparable or higher than the premium they get when their expectations are fulfilled," Ulyukayev said.

Currency appreciation is the Central Bank's most powerful weapon against inflation. The Central Bank has this year been gradually raising interest rates as well as mandatory reserve requirements. It last revalued the ruble in August 2007. "Today they sent a warning signal revaluing the ruble. The speculators will now think there will be more to follow," said trader Vasily Fedorov from Nomos Bank.

The Central Bank runs a managed float of the ruble, keeping it stable against the basket. It said in May that it would begin daily interventions in the local forex market to discourage currency speculators and make the exchange rate more flexible.

"All signs show the ruble can become an interesting speculative asset," said Nikolai Kashcheyev, analyst at VTB.