By Sean Hyman I love sitting back and watching exotic currencies when they near a tipping point. By that, I mean that they could easily (and quickly) go either way, depending upon how investors perceive the global economy in the near-term.

So what’s going on? Russia’s Micex stock index has now dropped just over 20% from its 2009 highs, which technically puts it back into bear market territory.

If this trend continues, it could really scare investors back out of Russia…its stocks…and of course, its ruble! In fact, you can see this story already starting to play out on the chart below…

The Ruble Nears Another “Tipping Point”

If the scare continues on, then the USD/RUB pair will bounce back upward off of that green uptrend line as traders sell rubles and buy dollars.

On the other hand, if the pair traded down into the bottom circled area, below the uptrend line…then it means that investors are willing to stick it out and hold onto their rubles for the time being.

But honestly, I just don’t see that happening. The 22% drop since its June 1st peak has been swift. It’s scaring the pants off of many investors right now. That’s what makes this ruble story so interesting.

You see, formerly this Russian index of 30 companies roared upward 135% since last October and that caused the USD/RUB pair to dive. However, if this downdraft continues onward, then rubles will be sold, as investors flee Russia for greener pastures in other currencies abroad. The first stop out of Russia’s ruble will most certainly be the U.S. dollar.

It turns out that my colleague Ashish Advani agrees with me. He posted his own bearish views on the ruble on his blog this morning. Let’s listen in…

Why the Ruble Is Heading South…

The recent drop of over 20% on the Russian stock market has me thinking about Russia and what’s coming next for Russia in the coming months and quarters…

The Russian Central Bank has been trying to help with the liquidity crises. They’ve been slashing interest rates in a big way. Of course, that’s also caused the ruble to drop dramatically in value.

The recent economic data suggests some tough times ahead for Russia (even with oil climbing higher!) Andrei Klepach, Russia’s deputy minister of economic development, just announced that real GDP contracted by 11% year-over-year (YOY) in May. Real GDP also contracted by 10.2% YOY over the first five months of this year.

That’s not all. It’s expected that Russia’s second quarter GDP number will decline about 8%. For the whole year 2009, economists are saying GDP could contract by 6-8% year-over-year. Meanwhile the IMF has forecast the drop to be around the 6% mark. All of this seems to clearly indicate that the recession is deepening in Russia.

Let’s see what other indications we can get on the economy:

1. Industrial output fell by 17.1% YOY in May. Output also dropped by 16.9% YOY in April, and 15% over the first four months of this year.
2. Retail sales dropped by 5.6% YOY in May, after falling 4.5% YOY in April, and after falling around 1.4% YOY over the first four months of the year.
3. The only silver lining on the horizon is that unemployment rate eased back to 9.9% in May, from 10.1% the month earlier.
4. The trade deficit has slowed down to $9.8 billion in May. For the first five months of 2009 this put the trade surplus at $36.3 billion. It stood at S$83.3 billion one year earlier. Exports were lower by 47% YOY over the first five months of the year, with imports down by 40% YOY.

The combination of the weak real economy outlook, plus the dramatically lower trade surplus suggests a coming weakness for the ruble.

Thanks Ashish! Okay, back to me…

Here’s Why I’m Watching the Ruble Right Now

I bring the focus to the ruble because of the BRIC nations that have rebounded so well…Brazil has only fallen about 8% off of its 2009 peak. India has dropped about 7% and China is roaring on and is at its higher levels for 2009.

So Russia’s currency would be the first to “feel the pain” if investors panic and head for the hills.

Keep an eye out on this one to see what traders and investors alike do with the ruble from this point. Get out your popcorn, folks…it should be interesting.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. If you haven’t checked it out yet, I urge you to visit Ashish Advani’s new blog. He’s answering reader questions, uploading FREE trading videos, and he just finished his latest letter to all his readers. You can view it all here FREE right now.

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