On Friday the Central Bank of Russia has lowered its benchmark one-week repo rate by 50bps taking the main refinancing rate to 10.5%, as widely anticipated, justifying inflation expectations continued to decrease amid an economic recession.

Policymakers also said a rate cut could be considered in next meetings if inflationary risks fall further and projected the annual inflation will reach the 4% target in late 2017.

This was widely expected by the analyst community and didn’t result in any significant market moves on the day.

The most notably the development from CBR is that they stated their intention to maintain real interest rates at between 2.5-3% over the medium term.

Should inflation remain around current levels this implies that base rates can reach 9.5% by year-end. Consequently, we think there is room for further front end yield compression which will benefit both local currency and hard currency bonds.

FX option strategy: Diagonal bull call spreads

For the RUB, as long as oil prices trade above 50 USD per barrel we think towards year end only a very modest depreciation is likely, consistent with shrinking interest rate differentials.

We have our doubts about this, but in any case, we maintain our view that USDRUB should trade around a central tendency of 67.5569 over the coming weeks. 

Hence, RUB among few EM currency space typically held firmly against the dollar in the recent past, so, sell 1M USD/RUB (1.5%) OTM calls vs buy 6M ATM delta calls, use European-style options.