Market Extra: Why the Russian ruble’s 10% drop versus the dollar might not be enough

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The sanctions-induced pain for the Russian ruble might not be over.

The currency’s plunge versus the dollar leaves it on track for its biggest weekly loss in more than three years, as traders try to price the risk premium necessary to brace for what’s still left to come.

In the week to Wednesday, Russia’s currency USDRUB, -0.6885%  is down 10% against the U.S. unit, according to FactSet, which would be its worst weekly performance since January 2015. The buck last bought 62.688 rubles, off its intraday high and actually down versus late Tuesday in New York, as volatility took its toll on the pair, offering some respite for the ruble.

The selloff was sparked by the U.S. government’s announcement of new sanctions Russian individuals. It was followed by rising tensions between Washington and Moscow after a suspected chemical attack in Syria, which President Donald Trump deemed Russia partly responsible for due to its support of Syrian President Bashar al-Assad. Trump also seemed to imply imminent missile strikes on Syria in tweets on Wednesday.

Read: Commodities are beating the stock market as geopolitical risk returns

“The latest move from the U.S. takes the level of sanctions, at least on certain entities, to a new level,” said Robert Simpson, portfolio manager at Insight Investment in emailed comments. The new sanctions prevent U.S. persons from owning bonds of aluminum producer Rusal RUSAL, +0.00% leaving the market “fearful that this could be extended to bonds of other Russian entities at some point in the future.” And more sanctions could mean a next, bigger bout of cross-asset selloffs.

Read: Aluminum prices jump after U.S. slaps sanctions on Russian producer

Not long ago, investors were touting Russia’s economic recovery and attractive rates as a reason for the ruble’s fundamental strength. Now, these arguments seem out of the window as market participants assess what could come next for the volatile pair.

Part of the reason for the massive reaction in the ruble can be found in that “the specification of recent sanctions represents an escalation compared with the U.S. financial sanctions that were imposed as a result of the Crimea annexation,” said Nimrod Mevorach, trading strategist at Credit Suisse.

“Just to illustrate how far the ruble rallied after the worst of the Ukraine-related sanctions, the 67 area represents the 38% retracement objective of the big 2016-2018 move. The high in January 2016 was near 85.95, and so we see scope for significant ruble weakness ahead,” read a note from Brown Brothers Harriman Wednesday morning.

“From a fundamental perspective the ruble looks oversold; however, in the short term, the direction will be determined by newsflow and positioning,” Simpson said.

On top of that, ”the lack of decisive response by Russian authorities reinforced the idea that the ruble is not anchored at this point, Mevorach added. Russian authorities have canceled their weekly bond auction and indicated that FX intervention was on the cards, Mevorach said, but these count as modest actions.

Now, market participants have to decide what risk premium will be enough to compensate for the fallout of potential future sanctions, which will determine the currency’s path going forward, the analysts said.

Earlier, economy minister Maxim Oreshkin said that the free-floating currency would mitigate the impact of new sanctions on the economy, according to a Reuters report. He characterized the current selloff as just “market volatility.” The ruble has been trading freely since November 2014, when Russia abandoned a previous peg.