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CBR maintained status quo in its monetary policy, the base rate was on hold at 7.25% on Friday which was widely anticipated. There was little astonishment in the bank's changed assessment that room for further rate cuts has narrowed – this is absolutely the resultant effect of stress on the ruble since the US imposed fresh sanctions on Russia.
Nevertheless, we did not find the hawkish language, given the situation: the bank made no mention of being ready to raise rates to defend the ruble.
Instead, CBR remarked that there is little chance of inflation overshooting the 4% target. Still, this does not mean that CBR is ready to cut rates soon either: policymakers noted a growing consensus on the bank's board about a higher equilibrium real interest rate for the Russian economy.
On that basis, CBR will likely view rates close to 7% as 'neutral'. And this would be consistent with the statement that the room for rate cuts has narrowed.
Despite what CBR says now, we think that the CB would cut rates further towards c.6.5% if the geopolitical risk premium were to calm down entirely. This would not be a far-fetched scenario for 2019.
We’ve had already initiated below mentioned option structures, for now, Contemplating above factors, we continue to uphold on to the same positions.
The RV edge can be further magnified by deploying OTM USD calls instead of ATMs: USDCAD risk-reversals are materially more depressed than USDRUB even adjusting for base vols (CAD 2M 25D RR 0.4, RR/ATM ratio 0.06; RUB 2M 25D RR 2.6, RR/ATM ratio 0.26) and discount little trade tension anxieties; the additional smile theta of the RUB leg is worth earning in our view in a rising oil price environment when RUB puts are unlikely to be called into play.
We open a 100:65 vega-weighted (premium neutral) long CAD vs short RUB 2M 35D USD call switch.
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