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We turn bearish in RUB on the concern of commodity headwind and seasonally weaker current account outlook over the summer. We are more cautious of the commodity exporter, as terms of trade are unlikely to be favorable for RUB as oil prices remain weak. Together with any potential return of generalized financial market volatility in the coming months, the effect will manifest itself in heightened volatility of RUB.
We recommend buying RUB vol via USDRUB call options. Directionally, we think RUB is vulnerable to weakening over the summer as the current account seasonally deteriorates.
Please be noted that the IVs are the highest among G20 currency space. The volatility parameters favor structures that sell topside skew to cheapen up bullish USDRUB exposure. Being long USDRUB is a good hedge for a portfolio with high yielder exposure.
Buy 3m USDRUB call strike 59, short call strike 62 knock-in 65 Indicative offer: 1.23% (vs 1.06% for the vanilla call spread, spot ref: 56.90)
The position entails buying a USDRUB 3m call strike 59 financed by a call strike 62, with a topside knock-in at 65 only on this short leg. This structure offers potential extra gains compared to the vanilla call spread capped at 62, as the pay-off captures upside up to 65.
In the event of a move beyond this barrier, the maximum gain is the same as for a vanilla call spread.
Our appearing call spread costs only 17bp more than a vanilla proposal, but it potentially hedges twice as much RUB downside (about 10% instead of 5%), providing additional exposure at minimal cost.
Risk profile: Limited to the premium paid Below the 59 call strike, the maximum loss is limited to the premium paid.
