Russian rouble slides on US sanctions threats; central bank decisions eyed

Russia's rouble slumped more than 1% on Wednesday, putting it on track for its worst one-day sell-off in three weeks after, US President Joe Biden's strong rhetoric against Russian President Vladimir Putin regarding 2020 US Presidential elections.

"He will pay a price," Biden told ABC News in an interview that aired on Wednesday. A US intelligence report on Tuesday bolstered longstanding allegations that Putin directed efforts to swing the election to Donald Trump, and sources said sanctions on Russian could come as soon as next week.

The rouble deepened looses to hit session lows as was last trading at 73.87 against the greenback. Russian dollar-denominated bonds fell across the curve with the longer-dated bonds such as the 2042 and 2047 issues losing some 1.6 cents, according to Refinitiv data.

"The comments from Biden were a lot more aggressive than what markets were anticipating," said Simon Harvey, FX analyst at Monex Europe, adding that the market now expects broad-based and more targeted economic sanctions towards domestic markets than previously imposed.

The latest threat comes after the United States and European Union imposed sanctions, albeit limited, over the alleged poisoning of Kremlin critic Alexei Navalny.

"Our structural view on (the) rouble is positive, we expect the CBR to hike and see stable economic fundamentals, but these periods of political risk pose a short term hurdle to our view, especially depending on how extensive and prolonged are they going to be and how much the relationship between the two countries suffer."

In broader emerging markets, the focus was on whether the US Federal Reserve will signal policy tightening earlier than anticipated. MSCI's index of EM currencies was down 0.2%, while the stocks counterpart slipped 0.6%, both down for a third day in four.

The dollar held steady ahead of the Fed decision due at 2 p.m. ET. Eyes will be on the reaction of US Treasury yields which hit new 13-month highs running up to the decision.

Brazil's real extended losses to a fourth straight session, down 0.7%. Brazil's central bank is expected to hike interest rates for the first time in six years as inflation surges. The government on Wednesday sharply raised its inflation outlook for this year to 4.4% from 3.2%.

"Anything less than a 50 basis points rate hike ... would probably be seen as a disappointment by the market, putting pressure on (real)," said Commerzbank FX and EM analyst Melanie Fischinger.

The real is among the worst performing EM currencies year-to-date, down 8%, thanks to worries about fiscal spending, political interference and rising inflation.