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While ruble’s medium term structural drivers are supportive, a sequentially dovish shift by the central bank and uncertain oil outlook keeps us neutral. The fundamental drivers of RUB over the medium-term look attractive: a large current account surplus (2.4% of GDP forecast for 2017), high carry and contained fiscal risks. For now, uncertainty surrounding oil prices and a recent dovish shift by the CBR keep us neutral.
The CBR has turned sequentially more dovish in the face of diminishing inflationary pressures and a strong currency. The CBR has accrued significant inflation-fighting credibility relative to its regional peers by maintaining a hawkish stance in anchoring inflation expectation to the target range. Last month’s 50bp policy rate cut to 9.25% was more than expected by both JPM and consensus and is a significant shift to the previous market narrative of a hawkish central bank in our view. JPM expects 75bp rate cuts for the rest of 2017, and we think the CBR will be eager to front-load rate cuts.
Growth momentum continues to firm although productivity still lagging. Russia’s 4Q16 GDP grew by 0.3%oya, in line with consensus. We expect growth momentum to firm to a 1.25-1.50%q/q SAAR pace in 1Q17 and 2Q17. One medium-term drag to growth is labour productivity which continued to contract through 2016, albeit at a moderate pace.
Looking at CEEMEA FX and in particular at the latest setbacks in RUB and ZAR the main question of course is whether these setbacks are denting the long-term up-trends or whether these are still intact and ready to extend towards 52.406 (2015 low) in EURRUB and to 54.503 if not to 48.850 (50 %/2015 low) in USDRUB. The latter remains the favored view unless EURRUB would break decisively above key resistance between 64.988 and 65.564 (in. 38.2 % on 2 scales) and USDRUB would break above 59.617/837 (March high/int. 38.2 %).
The recommencement of FX interventions may lead to near-term weakness. In the recent past, CBR and MinFin have reintroduced an FX intervention scheme, with the intention of smoothing the impact of volatile oil prices on the economy and government finances. As a result, we stopped out of long USDRUB positions earlier this week, but ruble now looks expensive to both our short-term and long-term valuation models; hold USDRUB 1x1 call spreads.
The original recommendation to enter bearish RUB positions was in large part predicated on CBR FX interventions acting as a catalyst to unwind large long positions.
We, therefore, do not advise buying spot FX exposure and stopped out of our long USDRUB position. Instead, we hold on to 2m USDRUB 1x1 call spread for now for two reasons. The Central Bank of Russia kept its benchmark one-week repo rate unchanged at 10 pct on February 3rd, as widely expected, and signaled the possibility of further cuts in the first half of 2017 has diminished, given the internal and external developments.
