FxWirePro: Construct RUB longs on CBR, geopolitical issues and valuations

CBR's latest monthly report pointed out that risk to growth forecasts is now to the upside following the c.200k barrels/day increase in oil output mandated by the new OPEC+ deal. Compared with past levels of output, this increase is not material – it only partly reverses the 300k barrels/day production cut which Russia had to agree to since 2016.

Nevertheless, a lower rate of production was in the assumption for current forecasts, against which this increase will count as a positive. Nevertheless, CBR estimates that the upside to growth will still not be strong enough for the central bank to change its current 2018 growth guidance range of 1.5%-2.0%.

For only Q2 2018, CBR now anticipates 1.8% growth which is higher than before – the difference is accounted for by the observed activity during the world cup. In conclusion, several positive factors are active in recent days which implies upside risk for our sub-consensus 1.3% growth forecast the year.

For now, we stick with the lower forecast, which is more driven by an assumption that fixed investment will decelerate from the impact of latest sanctions on the investment plans of systemic enterprises. Still, in the near-term, the upbeat news will likely be RUB-supportive.

We reintroduce cautious longs in RUB. When we closed our structurally bullish positions following the sharp escalation of geopolitical tensions in the recent months, we set a relatively low bar to reinstate longs given otherwise strong fundamentals. The condition was a period of calm on the geopolitical front that can improve sentiment. We believe that condition has now been met with little indication of an imminent risk of further punitive steps. We recommend longs in RUB in call options.

Valuations are also conducive. RUB now screens 7% cheap in our BEER fair value model, supported by higher oil prices. This takes into account the impact of the budget rule, which removes much of the current account surplus and reduces RUB beta to oil. Positioning is now also cleaner following non-resident selling evident in the J.P.Morgan's client survey. CBR likely to return to its easing cycle in August, if not earlier. Courtesy: Commerzbank, JPM

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