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CBR cut its key rate by 25bps to 6% at Friday's as we had expected. But contrary to previous months, when the central bank had begun to communicate that further rate cuts may not follow, this month the central bank sounded almost panicked, referring to forces which might cause a 'substantial' global economic downturn, and referring to its own disinflationary trend to conclude that risk to inflation lies to the downside. The MPC gave guidance that there is potential for a rate cut at one of the upcoming meetings which is CBR's default language for saying that the rate will be cut again at the next meeting, on 20 March. Chances are that CBR will cut again in April and June also, because it is difficult to envisage the inflation trend turning around between now and then; and CBR's panicky tone means that it is more likely now to front-load the cuts.
But beyond June, as a base-case, we do not expect further easing. This is because CBR still forecasts inflation to re-accelerate to 3.5-4.0% by the end of 2020 and GDP to grow by 1.5-2.0%. On that basis, a 5.25% policy interest rate would be closer to neutral. CBR is cutting rates only to compensate for undershooting inflation, hence, the real interest rate is positive and this supports the rouble in the medium-term.
On Friday of course, CBR did surprise market participants in the dovish direction with its guidance, and hence the rouble weakened notably. We do not see further downside from here.
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: 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
