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The Bank of Russia (CBR) cut its benchmark one-week repo rate by 25 bps to 6.25% during its December meeting and signalled more rate cuts were likely in the first half of 2020, saying households’ inflation expectations continue to decrease, while price expectations of businesses remain overall unchanged. Russian inflation moderated faster than CBR's forecasts could keep pace with, most of this year.
In November, too, it softened more-than-expected to 3.5%y/y from 3.8% in October. We estimate inflation in December to fall closer to the 3% mark, compared with the central bank's (multiple times downward revised) 3.2%-3.7% estimate. Food prices are playing a key role in disinflation at the moment, though. Because this component is not 'core', CBR will probably not consider a larger 50bp step this month. There is one potential hurdle in coming days too: the US Senate committee on foreign relations will debate and vote on the DASKA bill next week, which could lead to additional sanctions being imposed on Russian oil and gas, on banks and on sovereign debt. We think that harsh sanctions are rather unlikely, but this could be one reason CBR wishes to remain cautious for some more time.
We forecast the benchmark rate to drop further to 5.25% by the end of 2020. Such rate cuts are not expected to weaken the ruble because they are following the inflation data, not being implemented unconditionally.
Consider: 3M delta-hedged USDRUB 1*2 ratio call spread (ATM/25D) in vega notionals @9.65ch against @10.9/11.3 indicative.
Alternatively consider a RUB – ZAR RV trade, supported by the earlier screener on skews:
¾ Sell 3M delta-hedged USDRUB 25D call @10.9/11.3 and hedge it with 3M delta-hedged USDZAR 25D call @16.325/16.725, equal vega. Courtesy: JPM & Commerzbank
